Key personnel insurance

08 May 2002 by
Key personnel insurance

The loss of key personnel can have devastating effects on an organisation, both financially and in terms of staff morale. How can a business safeguard itself against such loss, especially when it comes as a result of sudden death or illness? And what steps can be taken to ensure that a supportive financial environment can be maintained?

Key personnel The most important people in a business are its founders and/or those key executives who are responsible for running the current organisation and making the decisions about its future direction.

Most businesses operate in a pyramidal structure, with the senior, decision-making, business-generating personnel at the apex. Clearly, the business itself would be at risk if these key employees were lost to the business. This risk can be managed by taking out insurance designed to compensate the company if these people should die or become unable to work due to long-term incapacity.

The company would pay the premiums for such insurance, being itself the beneficiary under the policy and receiving the sum assured in the event of a claim. The organisation would thus have the funds to allow it to rebuild by seeking out suitably high-calibre replacement personnel.

The sum assured would reflect the importance of the individual to the company, and may be a multiple of salary or a calculation from projected profits.

However, there may be other special factors which increase the importance of the key member. For example, Richard Branson's value to his Virgin Group would be much greater than that of a normal director due to his high media profile.

There are various types of insurance available to protect the business against the loss of key members.

Term assurance The simplest and oldest form of assurance provides for payment of a sum at the time of death, provided death occurs within a specified term. Should the person whose life is assured survive to the end of the term, cover ceases and no money is payable.

Key personnel can be insured by the business against death within a specified term, and the term may vary according to the business's own criteria. For example, it may be for the term of the key member's contract, both contract and insurance being renewed together.

Where the owner of the business and the key member are the same person, a longer term to retirement may be the most effective way of managing the risk.

Whole of life assurance Here, the sum assured is payable on the death of the assured person whenever it occurs. Premiums are either paid throughout the life of the assured or, more normally, until retirement at the age of 60 or 65. Even if premiums cease at, say, age 60, the policy is still in force, and should the person die at age 75 the policy would provide benefits for the beneficiaries.

Critical illness cover Here, the sum assured becomes payable on the diagnosis of any one of a number of specified diseases. These usually include coronary artery disease, heart attack, stroke, cancer, kidney failure, major organ transplant and paralysis. If a key person is diagnosed as having one of these life-threatening complaints, they will be unavailable to the business for some time and, at worst, permanently.

For a small business, it is vital to cover the risk of the owner being incapacitated, or of losing key personnel.

Permanent health insurance This type of policy protects the income of the policyholder and helps the cash flow of the business.

If the key member is unable to work due to sickness or accident, the policy provides a regular income to replace that which the insured person is no longer able to earn. The benefit only becomes payable once the insured has been incapacitated for a specified period, which may be set at four, 13, 25 or 52 weeks.

Benefits may be payable until retirement age, return to work or death, whichever is sooner.

You can appreciate that the guarantee to provide an income, possibly to retirement, means that the business does not have to find that cash. For a sole trader, such income protection is essential.

Having focused on the key personnel and how the business can be protected from the results of their death or incapacity, it is essential to create a protective financial environment for general staff members. These group schemes tend to be priced on a year-to-year basis and are relatively inexpensive to implement.

What they do provide is a "safety net" for staff members who deserve a sound financial environment to operate in. This is motivational to the staff and very effective planning from the business's viewpoint.

Consider the management time involved in dealing with a staff tragedy. If it is a death; should an ex gratia payment be made to help the surviving spouse and family? If it is a long-term incapacity; how long should a salary continue to be paid?

Group life assurance This cover would be arranged by the employer for the employees, with the sum assured (for example, four times gross salary) becoming payable in the event of the death of an employee during his term of service with the employer. Deciding which employees qualify may be determined by the inception date or the anniversary date in future years.

The premiums may be tax-allowable to the employer. The group life policy is, in effect a series of one-year life policies. Consequently, the cost tends to be low for this valuable staff benefit.

Group critical illness cover The benefits of this may be similar or less than those provided for key members. However, the costs are calculated annually on a group basis.

Group permanent health insurance As with group critical illness cover, the benefits may be similar or less than those provided for key members. Again, the costs are calculated annually on a group basis.

Conclusion The business environment is one of risks. However, businessmen, businesswomen and their staff are so involved in daily activities that they rarely think in such terms. The fact is, however, that through a carefully planned strategy using insurance, these risks may be managed so that the future of the business, its key personnel and its staff is protected.

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