Key person and critical illness business insurance protects a business against the loss of business critical individuals due to death, terminal illness or certain critical illnesses. If you lose a key employee to these causes then a key person policy package can pay you a lump sum to shore up profits, cover recruitment costs, help with lost contracts or pay outstanding loans.
Key person insurance is not a legal requirement but for a business which heavily relies on knowledgeable leaders, technical experts, high performing salespeople or dedicated managers a key person policy can keep you in the black in the event that a crucial team member is lost.
- What is Key Person insurance?
- Who needs Key Person insurance?
- What does Key Person insurance cover?
- What to Look for in Key Person Insurance
- How much Key Person Coverage do I Need?
- Average cost of Key Person Insurance
What is Key Person Insurance?
Key person insurance is a life and critical illness policy intended to protect a business against the cost of losing critical employees. It is sometimes confused with personal accident insurance but there are some important differences between the two.
Key person insurance policies vary from one insurer to the next; some are all-inclusive packages of several benefits and covers, whilst others require you to select which events will be covered, from unexpected death to critical or terminal illnesses.
Who Needs Key Person Insurance?
Key person insurance is primarily a form of business insurance; it protects a business from insured losses rather than paying an employee directly. Some personal accident policies provide business compensation but most key person policies do not compensate employees as their main function.
What Does Key Person Insurance cover?
Key person insurance covers losses of business critical individuals to death, disablement or critical illness, depending on the policy terms and conditions.
Typically a key person policy will pay businesses a monthly benefit or lump sum which helps to hire or train a replacement, or cover the financial losses incurred by the business whilst a role is unfilled.
- Geoff is a senior software developer for a company which provides air traffic control software. He is diagnosed with a terminal illness with a life expectancy of less than 12 months. His company claims on their key person policy which covers the cost of hiring and training a highly skilled replacement developer.
What to Look For in Key Person Insurance
Key person policies can be tailored to your specific business needs and as such you should speak to your broker or insurance provider to determine what policy, add-on or combination of covers is right for your business.
Typically, key person policies have the following features and exclusions:
- Monthly benefits based on employee salary
- Lump sum payments in the event of employee death
- Deferred / waiting periods before a claim can be made (often 2-4 weeks)
Non-specified or novel illnesses Very young or very old employees Fraud/misrepresentation Suicide
How Much Key Person Insurance do I Need?
The generally accepted calculation is to take an employee’s annual income and multiply it by a factor of between 3 and 5; remember these policies are intended to cover the costs of losing one employee plus the additional costs of recruiting, training and then paying a replacement, usually for a highly specialised or demanding role.
Average cost of Key Person Insurance
The average cost of key person insurance is hugely dependant on the extent of cover you are purchasing. Premiums generally start from £6 or £7 per month per employee, but as the level of cover, number of add-ons and number of employees continue to rise the premiums will also increase.
For extremely niche roles with high incomes, high value to employers and expensive consequences in the event of employee death, a quote is likely to require underwriting at which point your premiums will be based on all of these factors and likely in the hundreds if not thousands of pounds per month.