Key Person Protection

Michelle Costello joins Craig Skelton to talk about Key Person Protection. 

What is Key Person Protection?

Essentially, Key Person Protection is life cover or life and critical illness cover, designed to protect people who own and run their own businesses. It’s given the title of key person because it protects a person or profits within a business. 

You may have business owners, directors, or a key person employed in the business that is a specialist and critical to your company. They don’t have to be a director or owner. If you were to lose that person, it would have a huge impact. Key person protection mitigates against financial loss of losing that individual. 

It can be used to protect a separate entity or any debt for the business as well. So if you’re a business owner and you’ve got a debt as well as a key, crucial person within the business, you can have two separate policies, one to protect the debt and one to protect your profits.

How can I tell if I have a key person in my business?

Say I have my own business and employed an IT guru – and I needed that person to run our technology. If I lost that person, my business wouldn’t run: I couldn’t step in and take over that element of the work. I start to lose profit. I need to re-employ somebody to take on that role. 

Key person cover gives you a financial safety net. If someone crucial to the running of your business passed away or became critically ill, it means you’re not losing all of your income overnight. You would have a lump sum payout to give you peace of mind. 

How much of a priority is Key Person Protection?

It’s hugely important, but it’s just not something that business owners necessarily look at. People look to protect themselves personally, but don’t look beyond that. It’s often the case that they don’t know about it. 

Have you really considered what will happen to your business, to your income, to your family if anything happened to the people within your company? 

How does Key Person Protection work?

There are different ways to set up your policy – one size won’t fit all. So if you want to protect business debt, you set your policy up as a decreasing term. That way, the amount of cover decreases along with that business debt. That makes it a cheaper policy. 

The other option is a ‘level term’ basis, which means the amount you receive stays constant. This could be more relevant if you’re looking to replace a key employee. You will want to have their wage covered, especially if they are off with a critical illness so that you can continue to pay them. You will also want money for the business to replace that employee.

You can also choose an index linked policy, which matches the Retail Price Index. We all know why that’s important, especially here in April 2022, when everything has gone up rapidly in price. 

If you’re protecting your profits, an index linked policy is a good choice. It means you can still cover your costs no matter what inflation is doing – you can still open your doors because you’ve got your bills covered.

Can I use Key Person Protection if someone is leaving?

Key Person insurance is not like income protection. If somebody in your firm hands in their notice, you can’t claim on your key person insurance. It only applies when you lose a key person – it’s life and critical illness cover. It doesn’t apply if they’re off sick for a few days or they decide to leave. It’s not a short term solution. 

What is the typical size of business that needs Key Person Protection?

Large corporations don’t look to do this sort of thing – generally they have somebody to step in should the worst situation happen, because of the vast number of employees. It tends to be the small to medium businesses that take these policies out, because they often have a key person who is critical to the company – to make sure the doors stay open, and continue to build and grow the operation.

Smaller businesses don’t have the means to enter into the huge contracts that corporate companies can. So they need to look at these insurance policies alongside any personal protection that they might have.

Can I offset Key Person Protection against tax?

Yes, usually, but you need to speak to an accountant about that. You can run the policy through the business, by all means, so that business pays for it. But your accountants will give you specific tax advice. 

It’s not as cut and dried as relevant life cover, which makes clear business sense. Generally, though, tax efficiency isn’t a deciding factor for this cover. It’s about continuity for your business.

What’s the process to get Key Person Protection?

Because the types of policies are quite defined, it’s all down to having a conversation. As brokers we sit down with you as the business owner and really drill down into the needs of the business. 

We’ll ask you a lot of questions. Who are the key people? What are the profits in the business? Is that what you need to protect? Will you need salary replacement if somebody’s away from the business for the long term? Has the business got debt that needs repaying should anything happen to any part of the business? 

It’s all about understanding your needs and matching a policy to fit. It’s really important to seek advice, because there are so many different terminologies and options. Even for someone with experience, it can take a while to figure everything out. 

What happens after that initial meeting?

Once I understand the business and your needs, I take all that away and source the right solution. I’ll contact the different providers and explore the products they can offer to suit your needs. 

Then I’ll be able to come back and demonstrate how the most appropriate policy will work for you. Then, like any other life and critical illness policies, it’s a matter of going through a medical questionnaire for the person that needs the protection. It’s then underwritten by the provider.

The other key element is to ensure that alongside the application and medical questions we put that policy into a trust. A trust takes the money outside of the estate of the person covered, so it’s not subject to inheritance tax. 

For business protection trust, it goes directly to the trustees so it’s a quicker payment to the beneficiaries – the business owners that are left behind. 

How can I find out more?

If you feel this is something that’s relevant, reach out to an adviser. You can research it yourself but you can soon get caught up in all the terminology and not quite understand what it all means. An adviser can break that down into more simplistic language so that you actually do understand what the benefits are going to be to yourself and to your business.