What Is Keyman Insurance?
Keyman (or ‘keyperson’) insurance is designed to protect your business against the impact of critical illness, terminal illness, or death of your most crucial – or ‘key’ – employees.
The purpose of keyman cover is to help a business survive despite the loss of one of its important people, with the definition of ‘key’ being whether the person’s absence would cause major financial harm to the company.
A business might buy keyman insurance for its CEO, best salesperson or an employee with specialist skills and knowledge.
If the person named on the keyman insurance policy were to become ill or die, the insurance pay-out would help protect the business from the financial repercussions. Some businesses will only have one keyperson, while others might have several.
Here’s more about this type of insurance cover alongside some of its pros and cons.
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What is keyperson cover?
Almost all businesses (99%) have at least one key person, and almost four-in-10 (38%) have three or more key people, according to Legal & General’s latest State of the Nation report. But the report also found that only 18% have any insurance to cover key people.
As a business, your employees are one of your biggest assets. If you were suddenly to lose an integral member of your team, the financial consequences for your company could be severe.
Keyperson insurance can be taken out by a:
- limited company
- partnership
- limited liability partnership.
Keyman insurance is designed to pay a regular payment or a lump sum that can be used to cover things such as:
- a reduction in profits
- loan repayments
- replacement staff.
Who is a keyperson?
It’s up to the business to decide and designate who the key people are that need to be covered. Essentially, if their prolonged or permanent absence would affect the operation of the business, the person can be covered by keyperson insurance.
A keyperson might be:
- the CEO or chief technical officer
- a financial director or marketing director
- someone with a financial stake in the business
- a top salesperson
- someone with specialist IT knowledge
- a staff member critical to maintaining goodwill or relationships with clients
- a person integral to the image of the business.
How much keyperson cover does my business need?
How much cover your business needs depends on the individual circumstances of the business and the exact role of the keyperson.
When deciding how much cover you buy, you should consider:
- what the impact of the person’s loss would be
- what you would need to do to continue as a business as a result of the loss
- whether the person is revenue-producing and how much of the business’ income the person accounts for
- if the person is non-revenue producing, what their role is in the business
- the cost of recruiting to replace the person.
If the keyperson is revenue-generating, the amount of cover needed is calculated using profit multiples. If the person would need to be replaced, salary multiples are used instead.
How much does keyperson insurance cost?
The cost of a keyman or keyperson insurance policy varies depending on a number of factors, including the:
- insurance provider
- age of the key person to be insured
- pre-existing conditions and smoker status of the key people covered
- level of cover
- policy length
- whether the policy just covers life insurance or includes critical illness.
According to Drewberry Insurance, an insurance broker, a business would pay about £72 a month for £150,000 of combined life insurance and critical illness cover for a 45-year-old company director in good health, for a policy lasting 10 years.
What are the pros and cons of keyman insurance?
Keyman insurance can help your business survive the loss of an important person – but there are also some potential drawbacks to consider. Here’s a round up of some key pros and cons.
Pros
- Financial safety net: Keyman insurance policy can provide a financial safety net in the worst case scenario. The payout can be used to cover lost revenue, hire and train new employees or service any debts for which the key person was responsible.
- Reduced stress: The payout from a keyman insurance policy can provide some welcome breathing space as you contemplate the next move for your business in the aftermath of an unexpected loss.
- Improved confidence: Having a contingency plan in place should disaster strike can improve confidence in your business.
Cons
- Another cost: As with any type of insurance policy, an annual premium is payable. While the protection this offers could be valuable to your business, it’s another recurring cost to budget for.
- May require multiple policies: If you want to insure more than one key person in the business, you may need to take out multiple policies. Keyperson insurance is typically designed to cover a single individual.
- Requires personal details: During the application process, you’ll need to submit personal details about the individual you wish to insure – including their medical history. Some employees may be uncomfortable sharing this kind of information.
How can my business buy keyperson insurance?
Most major insurers such as Aegon, AIG, Aviva, Legal & General, Royal London, Vitality, and Zurich, sell keyperson insurance.
As always, it’s best to shop around for cover to find the best deal for your business. A professional advisor or broker can help you find the right policy.
Forbes Advisor adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by our partners.
