Businesses depend on their employees – some to a greater degree than others. If a business depends on a key person (or key people) to succeed or even survive, there is a kind of insurance the business can take out to protect itself in case something happens to that person. This is what’s known as key person insurance. It is sometimes referred to as key man insurance or key woman insurance.
While key person insurance provides cover in case of the death or illness of an employee, it’s not the same as group life insurance or personal life insurance – because it protects the business instead of the employee.
What does key person insurance cover?
Key person insurance covers the death of a key person in the business – so it will pay out if the key person dies. It can also cover the key person in case of critical or terminal illness, depending on the policy taken out.
What counts as a ‘key person’?
- Owner/founder or CEO
- Operations manager
- IT manager
- Sales lead
- An employee with many contacts
- An employee with a specialist trade
These are some common roles covered by key person insurance – but what counts as a key person will be different from business to business. It can be any employee who is essential to the running of the business or fundamental to its success.
Who needs key person insurance?
This kind of cover can be valuable for businesses of any size. It really depends on what the impact of losing a key employee would be.
Sometimes, the death of a key employee can have huge business consequences. It could cause loss of profits; loss of important contacts; disruption to fundraising; or loss of confidence from customers and/or suppliers. Key person insurance can provide compensation in case this happens – and can be the difference between a business surviving or not.
Whether or not your business needs the safety net of key person insurance should be considered on a case by case basis. If you know your business’ success depends on a key individual or key individuals, it can be a valuable kind of cover to have in place.
How much key person insurance do I need?
It depends which employee(s) you are insuring, what value they bring to the business, and what the financial implications would be if they were no longer around. In particular, it's a good idea to think tangibly about how much profit the key person creates and how much it would cost to replace them.
Who is the beneficiary of key person insurance?
The business that takes out key person insurance is also the beneficiary of the claim. If a key person dies while they’re employed, the business will receive the payout.
Key person insurance vs. group life insurance
Both key person insurance and group life insurance are taken out by a business for protection in case an employee dies. The key difference is in who the insurance protects: key person insurance protects the business, while group life insurance (or ‘death in service’) protects individual employees. Key person insurance pays the business if an insured employee dies; group life insurance pays the employee’s family if the insured employee dies.
Key person insurance vs. personal life insurance
Key person insurance protects a business in case a key employee dies while they’re employed. It compensates the business for the impact of that particular loss – whether it’s a loss of skills, experience, leadership, contacts, customer confidence, or otherwise. This is different to personal life insurance, which also offers protection against the financial impact of death, but is taken out by an individual to protect the loved ones they’d leave behind.
How Anorak can help
Anorak is an independent online broker for life insurance, income protection and critical illness cover. We can help if you're looking to take out personal life insurance – to protect your loved ones in case of your death. Take our quick assessment to get a personalised cover calculation and see the policies most suitable for your profile.