If one person couldn't return to work tomorrow, what would actually break?
It is a useful question for businesses considering Key Person Insurance.
The immediate answer is often the owner or managing director.
Sometimes that is correct.
But identifying genuine people dependency requires looking beyond job titles.
The key person who wasn't originally on the list
A specialist engineering company employing around 40 people approached the Clear Employee Benefits team to arrange Key Person cover.
The initial intention was to insure the two founders.
As the business's dependencies were explored in more detail, another individual emerged: its technical director.
He wasn't a shareholder and hadn't originally been identified for cover.
However, he held accreditations connected with several significant contracts and possessed specialist knowledge that would be difficult to replace quickly.
Cover was therefore arranged for him as well.
Two years later, the technical director died suddenly at 51.
What did the insurance actually provide?
Key Person Insurance cannot replace the individual a business has lost.
Its purpose is to help the organisation manage the financial consequences.
In this case, the claim provided funds that helped the company bring in experienced temporary expertise while looking for a permanent replacement.
Recruitment took several months.
Having funding available gave the business greater ability to recruit appropriately rather than simply as quickly and cheaply as possible.
It also provided financial reassurance while the organisation managed the impact on contracts and other commercial relationships.
The company survived and subsequently grew.
It may have survived without the insurance.
But it would have faced considerably greater financial pressure while doing so.
Who counts as a key person?
A key person doesn't have to be a director or shareholder.
Examples could include:
- a salesperson responsible for significant revenue;
- a technical specialist;
- somebody holding important licences or accreditations;
- a founder responsible for major client relationships;
- a senior adviser with specialist knowledge; or
- an employee whose absence would materially affect operational delivery.
A useful assessment therefore follows revenue, relationships, expertise and operational dependency, rather than simply seniority.
How much Key Person cover does a business need?
That also deserves more thought than simply selecting a multiple of salary.
The financial consequences of losing a key employee might include:
- lost profit or revenue;
- recruitment costs;
- temporary specialist support;
- disruption to important contracts;
- additional borrowing requirements; and
- the time required for a replacement to become fully effective.
The appropriate level and structure of insurance will depend on the business and circumstances.
Key Person Insurance should also be distinguished from Shareholder Protection. They address different financial risks, although some businesses may need to consider both.
Start with business continuity, not insurance
The most valuable part of a Key Person review can happen before any policy is discussed.
Which individuals does the business genuinely depend upon?
What would happen if they were unavailable?
How quickly could they be replaced?
And what would the financial consequences be during that period?
Answering those questions helps establish whether there is a risk that needs addressing and what role insurance could play alongside wider continuity and succession planning.
If your business relies heavily on a small number of individuals, the Clear Employee Benefits team can help identify the potential exposure and explore whether Key Person Insurance should form part of your business protection arrangements.
Contact ebenquiries@thecleargroup.com.
