How Key Employee Life Insurance Works for Your Business

Key employee, or key person, life insurance provides protection against the death, or loss for another reason, of a person who is integral to the daily operation and function of your business. This insurance type mitigates loss and financial damage in the event of a vital member of your business passing away.

Before you take out a key person life insurance plan however, you’ll want to understand the ins and outs of how this insurance works, and whether it’s suitable for your business. This blog post will fully inform you as to how key employee life insurance will work for you.  

Why would a business take out a key person life insurance policy?

A business would take out key person life insurance if they were worried that the loss of a specific member, or specific members, of their team would be devastating to the business. This may be in terms of finances, or business operations. 

Losing a key person can cause a major financial impact, because their role is somewhat irreplaceable. As a result, you may experience lost profits and increased expenses in trying to cover the work they were doing. 

Key person life insurance is designed to cover the finances which it would take to make up for these losses. This might be used to find a suitable replacement, cover lost income, or pay off debts. 

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What is key employee life insurance?

Key employee life insurance, often referred to as ‘key person life insurance,’ is a policy taken out on the most important member(s) of a business’s team. These people are labelled as ‘key people’ and are usually:

• Founders/directors
• Managers
• Highly skilled employees
• Employees with key contacts
• Specialists with hard-to-replace roles
  

You can typically choose who to name as a key person, as it’s at your discretion who you see as important enough to your business to insure. 

Key person life insurance covers the losses of these people if they die or become too ill to work; plugging financial loss through funding the replacement of this person in good time, or directly covering their contribution.

A similar option to also consider is shareholder protection insurance. 

How key employee life insurance works for your business

Key person life insurance starts with finding the right plan for your business. Whilst the basic premise of all key person insurance plans is the same (financial coverage for losing somebody), the specifics can vary. 

Speaking to a broker to establish exactly what cover you need is a crucial step. Certain finer points such as:

• Who you’re going to have protected under the plan
• The level of cover (death only or serious illness)
• Term vs permanent insurance
• Beneficiary structure
  

Some plans cover selected individuals only for death, whilst others also include serious injury or disablement in the plan. Also, you might just want cover for a fixed period of time, such as 10, 20, 30 years, or you might want it to be lifelong cover for the individual.

Another point which can vary is the business will be the sole beneficiary, or the primary beneficiary. Other structures can be integrated into policies, especially when part of a buy-sell agreement between partners. 

After telling your broker exactly what you want/need, they’ll search a wide panel of insurers to find a plan which best suits you, ideally at the best price possible. 

This benefits your business by giving you the peace of mind that you’re protected against the worst possible outcome. This insurance means that losing a key figure won’t necessarily be the end of your organisation, where it may have done otherwise.

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Losing a key employee in your business and how insurance supports you

Losing a key employee is difficult for a number of reasons. Not only is the emotional aspect of losing somebody who you’ve likely worked closely with to death or serious illness very taxing, but it also shakes up the internal operations of your business.  

Whilst key person insurance can’t undo the emotional side of this loss, it can mitigate losses in other areas, making the scenario easier to deal with overall. Key person insurance can support a range of things, including directly replacing the individual within the business, funding training for an existing employee to cover the responsibilities of the key member, or simply making up for lost profits that the turbulence has caused. 

For a quote on a bespoke key employee life insurance plan, get in touch with Dragonfly Crowd. We’ll search a wide panel of insurers to find the best possible protection plan for you and your business.