Published on: 3rd April 2020
If you’re a small business owner, you and perhaps a select few other employees are likely to be integral to the smooth running of operations. But figures suggest that millions could be vulnerable to the loss of these individuals as they don’t have adequate insurance in place.
What is key person insurance and how does it protect a business?
You can think of key person insurance as a business version of life insurance or critical illness cover. But rather than the pay out going to an individual, the lump sum goes to the business.
It’s a type of insurance policy that can help a business remain afloat, hire an employee with the right skills or simply buy some time if a key person were to be diagnosed with a critical illness or pass away. Financial protection products provide a way for us to build a safety net into a personal life for when things go wrong. Key person insurance works in a similar way for businesses.
You may be wondering if you even need key person insurance, but within most organisations, there are one or more key workers that would have a significant impact if they weren’t able to work for a long period of time. This could be the business owner, someone that uses their network to bring in new business or a professional that knows the firm that would be difficult to replace. The loss of a key person doesn’t just mean their job grinds to a halt, it can have a knock-on effect throughout an organisation.
Taking some time to assess how a business would fare without essential personnel is likely to highlight that key person insurance can be useful and provide a sense of confidence as you plan.
Millions of SMEs failing to protect themselves
If you’ve not considered key person insurance or opted not to take a policy out, you’re not alone. However, figures from Royal London suggests that 1.6 million SMEs have experienced the absence of a key person. What’s more, 41% said the absence of a key person would have a severe impact on their business.
Despite this, 4.6 million SMEs (79%) do not have key person insurance in place. Worryingly, 17% of SMEs don’t have any sort of protection in place for their business at all. Some 52% said they had not discussed business protection with their accountant, financial or legal adviser, or anyone inside or out of their business.
Ian Smart, product architect at Royal London, said: “The research highlights the glaring protection gap when it comes to SMEs. Despite many businesses recognising that a key person absence would have a severe impact, it is concerning that they have not yet talked about protecting their business with a financial adviser or taken out any form of protection.”
One of the key reasons for not taking out business protection was the perceived value for money (33%). However, if you quantify the impact the loss of a key person could have, key person insurance can end up looking like a far better deal. It’s worth assessing how much appropriate insurance would cost your business, the cost could be worth your peace of mind alone.
Another reason 20% of business owners didn’t take out business protection was feeling that it’s unlikely their employees would become seriously ill or if they do, they would be able to replace them.
No one wants to think about becoming ill, but it does happen. Every year, thousands of British workers are forced to take an extended period off work due to accident or illness. It’s something that’s out of your control, but that doesn’t mean you can’t put safeguards in place to ensure the business’ success should it happen. It’s worth thinking about how key employees benefit your business too. You may be able to find another worker with the same skills, but will they have the right connections, the ability to build relationships with key stakeholders or an understanding of how the business operates? The right person for the role is likely to be about far more than the hard skills they possess.
Providing you with business confidence
We know that running a business is stressful and often involves juggling many different aspects. Key person insurance may be something you’ve never considered before. However, it’s a step that can provide confidence for the business’ future and means that should something happen, you’re in a position to continue with ‘business as usual’ as much as possible.
If you’re interested in key person insurance, please contact us. We’ll help you understand what level of cover is appropriate for your situation and aspirations, as well as highlighting other steps that could provide you with security as you move forward.