Key Person Cover in Leicester
Key Person Cover in Leicester
Identifying the right person
The useful exercise is simple, and the answer is often not who you would expect.
Ask: if this person did not come in on Monday and was never coming back, what would happen to turnover over the next twelve months?
Run that question across the business and the answers separate quickly. Frequently the largest exposure is not the managing director but:
In smaller companies — which is most of Leicestershire's business base — the exposure is usually concentrated in one or two people, and it is far larger proportionally than in a big organisation.
- The salesperson who holds the relationships with the three biggest customers
- The technical specialist who is the only person who understands a critical process or system
- The buyer with the supplier relationships that secure your margins
- The person whose personal reputation wins the work
How much cover
Two common approaches:
A multiple of contribution to profit. Estimate the individual's contribution to gross profit and multiply, commonly by five to ten depending on how long recovery would take.
Replacement cost. Recruitment fees, salary at market rate for a replacement, training time, and the reduced trading during the handover period. This tends to produce a lower figure and suits roles that are specialist but replaceable.
Neither is precise. The point is to arrive at a figure that would genuinely allow the business to trade through the gap rather than a number that sounds reassuring.
Include critical illness — usually
Death is the obvious risk. Serious illness is the more likely one.
Someone off for nine months with a serious diagnosis can damage a business as much as a death, and the company still carries their salary while replacing their output. Adding critical illness to key person cover raises the premium but covers the more probable scenario.
We will price both so you can see the difference.
Where lenders get involved
Commercial lenders sometimes require key person cover as a condition of lending, particularly where a business is clearly dependent on one individual and directors have given personal guarantees.
If you are arranging a commercial mortgage or business loan, ask about this early. Arranging cover under time pressure at the end of a lending process is avoidable. See commercial mortgages in Leicester.
Review it as the business changes
Key person cover set up when a company was three people is unlikely to be right at fifteen.
Two things change: who the key people are, and how much they are worth to the business. Someone critical five years ago may now have a deputy who could step in — and someone unremarkable then may now hold the customer base.
Review whenever the shape of the business changes materially.
It sits alongside other business protection
Key person cover protects profit. It does not deal with what happens to a deceased owner's shares, or with business borrowing that becomes repayable.
Those are separate products, and a business with a real dependency usually needs to look at all three together. See business protection cover in Leicester.
What actually happens at claim
Worth knowing, because it shapes how much cover is genuinely useful.
The payout arrives at the business as a lump sum. What it then has to fund is usually more than people anticipate:
Immediate continuity
Covering the individual's work in the short term — overtime, temporary staff, or an interim at a premium rate.
Recruitment
Fees, and the time to find someone genuinely capable. For specialist roles in a competitive market this is rarely quick.
Lost trading
Customers who bought from a person rather than a company sometimes leave. Projects slip. A pipeline built on one individual's relationships can take a year to rebuild.
Reassuring everyone else
Lenders, key customers and suppliers all notice when a business loses someone central. Visible financial resilience matters at that moment.
That combination is why replacement-cost calculations often understate what is needed. The recruitment fee is the small part.
The tax position
Premium deductibility depends on the purpose of the cover, the individual's shareholding and the policy term, and the treatment of any payout matters too.
Take advice from your accountant on structure before the policy is arranged. We do not provide tax advice, and getting the ownership right at the outset is much easier than restructuring later.
Tell the person you are insuring
An obvious point that is occasionally overlooked, and it matters both practically and personally.
The individual must consent and complete medical underwriting, so they will know the policy exists. How it is explained is worth thinking about — being told the business is insuring your life can land badly if it arrives without context.
Framed properly it is straightforward and even reassuring: the company is protecting itself against a risk, in the same way it insures its premises, and it reflects how central that person is.
Where the individual is also a shareholder, this conversation naturally leads into shareholder protection, which is usually a discussion the owners should be having anyway.
Speak to us
We will help you work out who the business genuinely depends on and what a realistic sum insured looks like.
Call 0116 277 7536 or book a free consultation.
Cedar House, 3 Broad Street, Enderby, Leicester, LE19 4AA.
Common questions
Who counts as a key person?
Anyone whose death or serious illness would materially reduce profit. Usually an owner or director, but often a lead salesperson, a technical specialist, or the person who holds the key customer or supplier relationships. Job title is a poor guide — contribution to profit is the test.
How much cover should the business take?
Common approaches are a multiple of the individual's contribution to gross profit, typically five to ten times, or the estimated cost of replacing them and trading through the gap. The right figure depends on how long the business would realistically take to recover.
Who owns the policy and receives the payout?
The business owns it, pays the premiums and receives the payout. That is what distinguishes it from personal life cover — the money goes to the company to absorb the loss, not to the individual's family.
Should it include critical illness as well as death?
Often, yes. A serious illness that keeps someone away for a year can damage a business as much as a death, and it is statistically more likely. Adding critical illness increases the premium but covers the more probable scenario.
Are the premiums tax deductible?
Sometimes. Broadly, premiums may be deductible where the cover is purely to protect profits, the person is an employee rather than a substantial shareholder, and the policy is short term. The conditions are specific and the treatment of the payout matters too — take advice from your accountant.
Does a lender ever require it?
Yes. Commercial lenders sometimes make key person cover a condition of a loan, particularly where the business depends heavily on one individual. If you are arranging business finance, ask early whether it will be required.
Related
Important information
This is a protection policy with no cash-in value at any time. Cover is subject to underwriting and to the terms and exclusions of the individual policy. If you stop paying premiums, cover will end.
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