Wealth Management: Protecting key employees
In the fourth blog in our Wealth Management series, Moore and Smalley explains how to protect key employees.
Key person insurance protects a business against the financial and operational impact of losing an important individual, typically due to death, serious illness or disability.
This type of insurance means the business is the beneficiary if it loses an employee with niche technical expertise, special relationships with customers, or extensive operational knowledge.
Large and small firms can benefit
Key person insurance – also known as key man and key employee insurance – is especially important for small businesses with a limited workforce that relies heavily on one or two highly skilled people.
Larger organisations can also benefit from taking out key person insurance for senior managers and specialist staff, in whose training and development they have invested heavily.
For example, you may lose valuable management skills that could reduce profits and productivity – not to mention incurring significant costs involved in recruiting or training new people. In this case, key person insurance can help fund recruitment or training costs, as well as covering overheads until a replacement is found.
Flexibility combined with peace of mind
How the payment is spent is entirely down to the business, and might include paying utility bills, debts, or the employee’s salary.
By protecting key people in this way, shareholders have the peace of mind of knowing that the business can continue on an even financial keel. It is important to keep in mind, though, that key person insurance gives protection to the business, not the key employee.
The insurance premium is relatively low compared to the potentially damaging effects of a key person’s absence from the business. All the same, businesses should not rush in and buy this type of cover without carrying out an audit of employees to establish who is sufficiently valuable to justify the investment.