Illness can cost a business more than a death
When a key person dies, the business grieves and then looks for a replacement. When a key person falls seriously ill, things are less clear. They may be off for months, return part time, or decide they cannot come back at all. You may want to keep paying them, keep their role open and cover their work at the same time.
That makes serious illness a real financial risk for a small company, often a bigger one than death. Critical illness cover gives the business cash at the point of diagnosis, when the uncertainty starts. It also lets the directors make calm decisions about the role instead of rushing.
How the cover works
The company insures the person for an amount linked to the financial impact of losing them, such as their contribution to profits. If they are diagnosed with a condition on the insurer's list and meet its definition, the insurer pays the business.
Most companies combine it with life cover, so the policy pays once on whichever happens first. Others hold a separate critical illness policy. Definitions vary between insurers, particularly around how serious a condition must be, so the detail matters as much as the price. Ask how each insurer treats conditions found early, as some pay a partial amount and keep the rest of the cover in place.
- Pay a temporary replacement or contractor
- Make up lost sales while clients adjust
- Keep paying the person's salary as they recover
- Reassure a lender who asks about key people
Pairing it with executive income protection
Critical illness cover pays a single lump sum on diagnosis. Executive income protection pays monthly while the person cannot work, whatever the cause, once the waiting period ends. They answer different problems.
A lump sum suits a business that needs to act fast, while monthly benefit suits one that mainly wants to keep a salary going through a long recovery. Many owner managed companies hold both on their most important people. Tax treatment differs between them, so ask your accountant to compare the two for your company.
Choosing an amount you can justify
Insurers want the sum insured to reflect a genuine loss. For illness cover, think about how long the person might be away, what it would cost to cover their work and how much revenue could slip while they recover.
Some businesses insure a lower amount for illness than for death, on the basis that a person who recovers may return. Others match the two. The underwriter will ask how you reached your figure, so keep a short note of your reasoning and have recent accounts to hand.
How Hi Tomorrow helps you protect against key person illness
We look at who your business depends on and how an illness would affect turnover and costs. From there we suggest an amount, whether to combine it with life cover and how it would sit next to any income protection already in place.
We compare the insurers on our panel, paying close attention to the conditions each one covers. The person being insured deals with us in confidence about their health. If they are diagnosed, we help the business with the claim.