What a key person is
A key person is anyone whose absence would cost your business money. That might be you as the owner, a director who brings in most of the clients, an engineer who holds knowledge nobody else has, or a manager who keeps the operation running day to day.
Small firms often depend on one or two people more than they realise. A useful test is to picture the next six months without that person. If sales would fall, projects would stall or a bank would start asking questions, you have found a key person.
- Founders and owner directors
- People who hold the main client relationships
- Staff with specialist skills or qualifications
- Anyone whose name sits behind a contract or loan
What the payout can be used for
The money goes to the business, and the directors decide how to spend it. Common uses include covering a dip in turnover, paying a recruiter and the salary of a replacement, finishing a project the person was leading, or showing suppliers and lenders that the business can carry on.
Some businesses use the payout to buy time. A cash cushion gives the remaining team room to make careful decisions, rather than rushing a hire or selling assets at the wrong moment. It can also keep staff on the payroll while you rebuild, so you hold on to the people who know your customers best.
Working out how much cover you need
Insurers want the amount to reflect a real financial loss. Common methods include a multiple of the person's share of gross profit, a multiple of their salary, or the cost of debts that their loss would put at risk. The underwriter will ask how you arrived at your figure, so it helps to have recent accounts to hand.
Think about how long it would take to recover. A role that takes a few months to fill needs less than one where the business might need years to rebuild relationships. We can talk you through the methods and help you settle on a figure you can explain.
Life cover, critical illness cover or both
A life only policy pays if the key person dies during the term. Adding critical illness cover means the policy can also pay if they are diagnosed with one of the serious conditions the insurer lists, such as some cancers, heart attacks and strokes. For many small firms, a long illness would cause as much disruption as a death, because the person may be away for months while the business still pays them.
Critical illness cover costs more, and each insurer sets out which conditions and severities qualify. Some businesses cover their most senior person for both and other staff for life only. We can set out the options side by side so you can weigh the cost against the risk you want to cover.
Tax points to discuss with your accountant
The tax treatment of key person cover depends on the purpose of the policy and the people involved. When a policy is a term policy taken out only to protect against a loss of profits, and the person insured does not hold a significant stake in the business, the premiums may be allowable for corporation tax. In that case, the payout is normally treated as a taxable trading receipt.
Where the premiums were never claimed as an expense, the payment normally escapes income tax. Cover taken out to repay a capital debt follows different rules again. Your accountant should confirm the treatment for your company before the policy is set up, because the choice affects how much cover you need.
How Hi Tomorrow helps you protect your key people
We start with a conversation about how your business makes money and who it leans on. From there we suggest who to cover, whether life cover alone is enough or critical illness cover is worth adding, and how long the policy should run.
Next, we compare the insurers on our panel and prepare the financial case the underwriter will want to see. We handle the forms and the medical questions with the person being insured, keeping their details private from colleagues. If you ever need to claim, we help the business through it.