Key Person Protection
WHAT IS KEY PERSON PROTECTION?
Key person protection allows a business to insure against the financial loss it may suffer if a key employee (also referred to as a ‘key person’) dies, is terminally ill or suffers a critical illness.
A key person is an individual whose skill, knowledge, experience or leadership contributes significantly to the company’s continued financial success.
Insurance can be bought in order to financially protect a business against the death or serious illness of a key person. You or your business will be the policy owner. The key person is the life assured. The business is protected and receives the proceeds of any claim.
Key Person Case Study
Jim Bailey is the Sales Director of EZE Electronics. He has been with EZE for five years. He has established a network of industry contacts and built strong business relationships with five of EZE’s largest customers. He is essential to the success of the business and has a salary of £130,000 per annum as well as a bonus of up to 50% of salary, dependent upon sales targets being met. Sadly, and unexpectedly, Jim suffers a serious heart attack and dies.
With key person protection in place
Two years ago, EZE took out key person cover on Jim for a death benefit worth £700,000, based on a maximum of five times Jim’s salary plus annual bonuses. The policy was short-term insurance lasting five years, and cost a premium of £50 per month. EZE took out the key person insurance to cover any potential loss of profit caused by the loss of Jim through serious illness or death, and to contribute towards the cost of recruiting a suitable replacement. In addition, EZE also arranged ‘death in service’ benefits and a pension for Jim’s wife and two children.
Without key person protection
Although the company was in a healthy trading position, the loss of Jim resulted in an estimated fall of 20% in profits for the financial year in which he died and put the company financial position at risk, significantly reducing the amount of share dividend to the shareholders.