23rd February 2021

Keyperson Cover … every company should have it.

Every business takes great pains every year to make sure they have the most appropriate insurance in place to look after their office, premises, stock, employers liability etc. This is all fine and dandy but they are missing out on the one type of policy that could save them thousands and that policy is Keyperson cover.  

Whether you are a big or a small company, what would you do if you lost your key head of sales or your vital finance director? You would be under massive pressure and this pressure would not just be emotional but also financial. 

Having Keyperson cover in place on the lives of key employees ensures peace of mind for the company. It is simply life insurance taken out by the company on the life of one or more employees who they view as being vital to the company’s continuing success and viability. The employees do not have to be shareholders in the company but their roles in the financial success and stability of the company are hugely important.

If the UK experience is anything to go by – it is staggering how few companies put this cover in place and we have no doubt companies in Ireland are no better and suspect that they are worse!

Royal London did a survey in the UK in 2018 and found that only a quarter of SMEs insure their key people*

*Royal London Group, 2018 - https://www.royallondon.com/media/press-releases/2018/january/three-in-four-britishsmes-fail-to-insure-their-most-valuable-asset/

Yet the odds of a company losing a key employee are pretty short at a little over 5/1 i.e. There is an 18% chance that in a firm with two key people, one will die before the age of 65**

** CSO Table 16 on Irish Life 2010/12; all key persons assumed to be aged exactly 40 and males.
 
Having Keyperson cover in place can ensure that the company can cope with the following which may occur when a key employee passes away:

·         Loss of sales if the individual was a big sales producer.
 
·         Need to pay off a bank loan that the key employee had personally guaranteed.
 
·         Requirement to buy out the keyperson’s shareholding and compensate their next of kin.
 
·         Need to hire a suitable individual to replace the key employee.
 
·         Need to hire a temporary replacement for the key person until a permanent replacement can be hired.
 
·         Loss of a key contract which the key employee was responsible for.
 
·         Potential loss of other valued employees who worked closely with the departed key employee.
 

These are just some of the impacts losing a key employee can have so they underpin for all companies, particularly SME’s (who may have a lack of depth in personnel) the need to take out keyperson cover.

 It is very easy to take out the cover but as it is a company that takes out the policy there are certain procedures to be followed plus tax advice to be listened to as tax relief can be got on the payment of the premiums but also there may be tax payable on any claim amounts.


There are 5 key steps to take…

1.        The decision on who is to be covered. This revolves around the board and management of the company deciding what are the financial and other risks (e.g. business disruption) to the company if certain key employee (s) passed away.
  
2.       What amount of cover is needed. This is estimated by the company and can be done either by looking at what the hit to the company’s profits might be or by using a multiple of the key individual’s salary. The former is trickier as it is difficult in most cases to apportion how much of a company’s profits are due to one person.  The latter is therefore more commonly used and typically the cover amount chosen is between five and ten times the relevant key individual’s salary. Needless to say, there are other factors that also may impact on the final chosen cover amount e.g. if the individual has personally guaranteed loans to the company they need to be factored in too.
  
3.       The length of the cover period i.e. the term of the policy. This should reflect the estimated length of time the key employee will be in that role. For example, it may be up to the company’s normal retirement age or if it was being put in place for a certain project – it could be just for the term of that project.
  
4.       Now that the decision has been made on who to cover and the amount of cover decided plus the term, the company’s board would then pass a resolution to this effect. 
 
5.       The simplest part which is completing the relevant life company application form.
 
Whilst words like boards and resolutions may seem like terms associated with large companies, it is more important that small companies and SME’s have this cover in place as typically they don’t have big balance sheets and significant personnel resources to withstand the immediate financial and other pressures brought on by the loss of a key person. 


Finally, it is well worth highlighting that adding serious illness cover to a Keyperson policy gives a very important additional level of comfort as not only are you now protecting the company against the death of a key employee but also against them getting a serious illness e.g. cancer, heart attack, stroke, MS etc.

And Yes the chances of serious illness occurring are unfortunately much more likely than death….if we go back to that UK Royal London Survey we alluded to earlier the results are stark and again we can rest assured it is a similar experience in Ireland..

·         3 out of 10 SMEs have lost a key employee for three months or more due to a serious illness*

*Royal London Group, 2018 - https://www.royallondon.com/media/press-releases/2018/january/three-in-four-britishsmes-fail-to-insure-their-most-valuable-asset/

 
Low.ie are experts in all areas of life insurance including keyperson cover and they have organised this type of cover for many successful Irish companies so call them today on 01 9017760 or email andrea@low.ie for a chat.