Interdependence is an integral part of any business.
For this reason, the death or serious illness of a key employee and/or business owner can result in loss of profit, contacts and investment. In addition to this a lack of capital can result in an inability to recruit a successor to the business and could put obstacles in the way of the surviving business owner’s desire to purchase the deceased’s shareholding.
Business Protection insurance is a possible solution. However, it is often considered by business owners when it is too late. When recommending protection to our business clients it is vital that it is structured correctly and the appropriate legal agreements are put in place.
Who is considered a keyperson?
A keyperson is any “key” employee, director or consultant on whom the business depends for its continued successor existence and on whose death or serious illness the business could suffer a financial loss.
Why put life cover in place on a keyperson?
Put simply – to protect the business from the financial impact of the loss of a keyperson due to death or serious illness.
Some of the ways in which a business can be impacted include:
- The business will have to survive without the keyperson’s business contacts, management experience, or their in depth knowledge of the business. This can lead to a reduction in service standards, loss of staff confidence,
and the loss of important clients and suppliers. - Bank loans could be called in if the keyperson had given a personal guarantee.
- There could be a withdrawal or a reduction of credit facilities by banks or suppliers who are concerned about the future of the business without the keyperson, even if that keyperson hadn’t given any personal guarantee.
- Loans made by the keyperson to the business (director’s loans) will have to be repaid.
- There will be the additional cost of recruiting a suitable replacement.
How does keyperson protection work?
A life assurance policy is effected by the business on the life of one of its employees or directors, with a view to compensating the business for the anticipated financial loss in the event of the death or serious illness of that keyperson.
The business takes out the policy on the life of the keyperson on a life of another basis, with the business as policy owner and payer, and the keyperson as life assured.
How much should you protect a keyperson for?
When assessing how much a keyperson is worth to the business, there are some general guidelines we suggest you should consider when calculating a reasonable level of protection:
- 5 to 10 times their current annual salary
- Twice the gross profit attributable to that keyperson
- 5 times the net profit attributable to that keyperson
- Amount of loans outstanding
This document is intended as a brief introduction to shareholder protection. For more detailed information please see our shareholder protection advisors guide.
