Time is running out for small businesses. Only 18% of small businesses have key man insurance to cover the death of a key employee, despite the fact that two thirds of businesses recognise and fear this possibility, according to Scottish Provident.
The vast majority (65%) of companies agree that the death of a senior employee would have a ‘severe impact’ on their business, with over half (57%) also accepting that the business would be severely affected, if a key employee were out for just six months, due to serious illness. Again, only 18% of small businesses have planned for this eventuality, by taking critical illness cover within a general key man insurance plan.
With key man insurance, policies are taken out, not for the direct benefit of human beneficiaries, but to offset the costs of tragic events for a company or business.
The reasons for taking key man insurance are proven by the figures: in a small business with 4 key male employees, there is a 29% chance that 1 of them will die before retirement, and a 68% chance that 1 will suffer a critical illness, according to Scottish Provident.
Key man insurance (also known as keyman insurance, key person insurance or keyperson insurance) can secure the stability of a business in adverse situations, in a variety of ways.
If a director has given personal guarantees on a loan to the business, for example, key man insurance cover, paid by the company to insure the director’s life for the amount of the loan, means the business can repay the loan, with no impact on profits, if he dies.
In partnerships, key man insurance comes into its own in unexpected buyout situations. If each partner has both a critical illness insurance policy and life insurance cover, and a tragic event (either critical illness or death) occurs, the key man insurance can enable the other partners to buy the partner’s share of the company, with no impact on the company’s reserves.
