Life Insurance is most commonly purchased to provide family protection. An often overlooked area is how Life Insurance can help businesses (small and large) protect against the effects of the death of a key person. This type of insurance is often referred to as Keyman Insurance.
Why would a small business need Life Insurance?
Whatever the size of a business, there will always be a key person or persons involved. For a small business this could mean the owner(s) or a senior person working in the business. For instance: –
- If the owner (or one of the owners) of a business was to die, how would the business be able to cope?
- If, for instance, the Sales manager of a small company was to die, how would the business continue to attract new sales?
The sudden death of a senior figure in a business can lead to a serious financial disruption to the business that could take a long time to recover.
Life Insurance can be taken out by the business to protect it against financial catastrophe on the death of a senior figure. The insurance can therefore help a business continue to operate without the loss of jobs.
Why would a large business need Life Insurance?
In the same way as a small business, the death of a senior figure in a large business could lead to difficulties, albeit the effects will have a lower overall impact, the financial loss in monetary terms can be as great. Many large businesses insure their senior staff against death.
How does Life Insurance work in a business?
Basically the business will take out a life insurance policy on the life of the key person in the business. The amount of life cover is usually assessed as the anticipated financial impact of the loss of the key person. This will include such things as the loss of sales, the employment of temporary cover and the recruitment costs of finding a new person.
Is a business able to insure against critical illness of a key person?
The simple answer is yes.
The business can insure the key person against the diagnosis of a critical illness or long term sickness. Again the amount of insurance is calculated as the potential financial impact of the loss of the key person. In the event of long term illness, many insurance companies will only provide protection equal to the salary of the key person.
Can the shareholders of a small business be insured?
Where there is a small business with just a small number of shareholders the business may be arranged so that on the death of one of the shareholders, the remaining shareholders will need to purchase the shares from the estate of the deceased.
In this situation each shareholder is insured and the policies placed in a trust for the benefit of the remaining shareholders. This allows for funds to be available for the remaining shareholders to purchase the shares of the deceased.
This article is for guidance only and must not be construed as advice. The contents of this article are aimed at the UK market, although many countries will have similar policies available. If you need advice you should refer to a Financial Adviser.