What is key person insurance and how does it protect a business?

There are so many different insurance policies on the market these days, whether it's for your own use or your business's. Sanderson Financial, a Gloucester-based financial planning practice with over thirty years of experience, gave SoGlos the lowdown on a product that will benefit businesses in one of the most difficult times a company can face.

By Sarah Kent  |  Published
In one of the most difficult times a business and its staff can face, key person insurance can provide some financial support during the transition period.
In partnership with Sanderson Financial  |  sandersonfinancial.co.uk
Sanderson Financial

Sanderson Financial is a corporate and personal finance management company based in Gloucester. In its 30-year history, it has helped generations of families take care of their finances, priding itself on its dedication to ensuring clients make informed decisions to support their financial goals today, tomorrow and in the years to come.

Insurance is such important protection to have, whether it's for your car, your life or your house — we never know what the future will hold; so to have peace of mind with the back up of a financial payout, should anything go wrong, is crucial. But what you might not realise is that businesses have access to quite a special insurance policy — one that insures them against the loss of their biggest assets... their employees.

SoGlos spoke to William Collins, managing director of Gloucester-based Sanderson Financial, to find out about key person insurance and its benefits to businesses in the event of a loss.

Why would a business need key person insurance?

In the dynamic and competitive landscape of the business world, companies often rely heavily on the skills, expertise and leadership of certain individuals. These individuals, often referred to as 'key employees' or 'key persons', play a pivotal role in driving the company's growth and success. Key Man Insurance, also known as Key Person Insurance or Key Employee Insurance, is a valuable financial tool that business owners can utilise to protect their enterprises from the potential financial impact of losing a key individual.

And how does it work?

Key Man Insurance is a type of life insurance policy taken out by a business on the life of a key employee, owner or executive. The purpose of this insurance is to mitigate the financial risks associated with the unexpected death or disability of the insured individual. In the event of the insured's unfortunate demise or disability, the policy provides the business with a lump-sum payout. This payout can help the company cover various expenses, including recruiting and training a replacement, repaying debts, sustaining day-to-day operations and maintaining business stability during a challenging transition period.

What other benefits does this type of insurance have for business owners?

It offers financial Protection — Key Man Insurance acts as a safety net, offering financial security to the business in case of a sudden loss of a key individual. This financial cushion can help the company weather the storm without compromising its operations or long-term viability.

It also allows for a smooth transition during a difficult time. Losing a key employee can disrupt the company's operations, client relationships and overall momentum. The insurance payout can facilitate a smoother transition by covering the costs of hiring and training a suitable replacement, thereby minimizing downtime and maintaining business continuity. Employees may feel more secure knowing that the company has measures in place to handle unexpected situations; and this can positively impact morale, productivity and employee retention.

A business should also consider its creditworthiness during this time. For businesses with debts or loans, the sudden loss of a key person could potentially affect the company's creditworthiness. The insurance payout can be used to settle outstanding debts, ensuring that the business maintains a favourable financial standing.

Investors and stakeholders often assess a company's risk profile before investing. Key Man Insurance demonstrates a proactive approach to risk management, enhancing investor confidence and potentially attracting new investment opportunities.

And to sum up for a business considering this for itself?

Key Man Insurance serves as a strategic risk management tool that offers invaluable protection to businesses against the unforeseen loss of key individuals. For UK-based companies, the benefits of this insurance help to maintain operations and navigate a challenging transition period. As business owners strive to secure the future of their enterprises, Key Man Insurance stands out as a proactive measure to ensure stability and success, even in the face of unexpected adversity.

Approved by The Openwork Partnership on 13-09-2023.

In partnership with Sanderson Financial  |  sandersonfinancial.co.uk

More on Sanderson Financial

More from Business