As a small business owner, you soon find there are all sorts of insurance policies you have to take out. Keyman insurance may not be one you have thought about. However, without it you could find yourself in a very vulnerable position.
The question to ask yourself is: What would be the effect on my business if I suddenly lost one of my key personnel? This could be anyone you regard as crucial to the success of your business – a director, a partner, a key manager or an employee with specialist expertise or skills. Even a major shareholder.
Keyman insurance is offered by most major insurance providers as an addition to their life and critical illness policies. The idea is to protect your business against the effects of losing any of these key people – either temporarily, through serious illness or accident, or permanently through death.
So if you take out a keyman insurance policy, what exactly are you insuring against? There are four main elements to keyman insurance and you can include any or all in your policy.
1. The policy can provide an immediate lump sum, to help you with the costs of recruiting temporary staff and/or recruiting and training a permanent replacement.
2. If the key person concerned was a shareholder, his/her family may want to sell the shares, but you may not want the shares to go to someone who may not know much about the business. Similarly, if it is a partner who is lost, you may want to retain his/her stake in the business. The insurance can provide the finance to buy the shares or partnership from the holder’s estate.
3. If you have taken out a bank loan for your business, the bank will probably have required a personal guarantee from one of your senior staff, especially if you are a small or new business. If that staff member dies or becomes incapacitated, the bank will be in a position to call in the loan. You can structure your policy to provide the finance to repay the loan.
4. Apart from the actual cost of replacement, the loss of a key person could actually directly impact your profits. You can include loss of profits in your policy.
Taking the correct legal advice is just as important as establishing a Keyman policy. The way a company is structured, including the Memorandum and Articles of Association, can affect what happens when a shareholder or Director dies.
If you are a small business and are struggling to stay afloat, you may well see this as just an extra expense you can do without. But remember that the smaller you are, the more impact the loss of one of your key people will have. If you’re unsure, talk to a broker, who will help you decide whether a keyman insurance policy is right for you and your business.