subject: Could Your Business Cope If A Key Person Fell Ill? [print this page] It has been reported that more than 80 per cent of small businesses have no cover if an important employee is unable to work.
A serious illness or accident is not only bad news for the employee, but for small business owners it could have a severe in impact on the business performance.
Recent research carried out by Scottish Widows identified that 81 per cent of small businesses who have key people in their business are not covered for the loss in profit or cost of replacing those people. At the same time four in five sole traders admitted they have at least one person whose absence through critical illness, accident or even death would have a negative affect on the business survival.
Due to the current recession many small businesses are more concerned about cash flow rather than prepare for the unexpected loss of a crucial member of staff.
Certain protection policies such as life insurance and critical illness cover work in the same way for small businesses as they do when purchased by individuals. Similar to individual protection policies, key person policies can be tailored to the needs of the company. Critical Illness can be purchased alone or combined with life insurance and provides protection against an employee being diagnosed with a serious condition. Other types of policies such as Income protection pay out a regular income if the person is unable to work due because of illness or injury. In this situation a business could use the money to pay for any temporary staff.
Before a business takes out any key person cover it is advisable that they seek some guidance from a broker such as www.ContactInsurance.co.uk, who can talk small businesses through what policies are available and suggest appropriate cover according to the companys needs and requirements.
Key Person (keyman) Insurance falls under the umbrella of life insurance and is taken out by a company to cover someone who is considered to be vital to the business. The primary aim of key person insurance is to help cover any shortfalls from the loss, temporary or permanent, of a particular person. This key person would be deemed to play a significant role within the business and would therefore leave the business struggling if they were unable to work. A key person would typically be a director or business partner, but a key project manager could also be covered under a keyman policy.
The most basic key person policies will only pay out on death, but the more comprehensive policies will have a critical illness add-on, which will pay out for serious conditions such as cancer and heart attacks.
When deciding on the level of cover required, there are two common ways of doing this. The first is to work out profit calculation such as five times net profit the key person brings to the company, or two times gross profit. The alternative way for calculating the cover required is to multiple the key persons salary up to 10 times gross income for that person. Other factors that need to be considered include the cost of recruiting and training a replacement as well as the potential fallout from lost sales and specialised skills.
by: David Yates
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