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Insurance provides an umbrella in times of uncertainty. Businesses often operate on tight margins and limited cash flow. Any sudden disruption can cause significant financial problems.
And for many small businesses, any major disruption to operations might be enough for permanent closure. Experts recommend small businesses have up to 6 months of operating costs kept in cash reserves to outsee any problems.
However, in reality, half of small businesses would struggle to see out one month if revenue dried up. And losing key personnel could be enough to bring a small business down. Unless a suitable insurance policy was in place for protection.
What does key man insurance provide?
Like any type of insurance policy, key man insurance provides a safety net during trying moments. In this instance, the insurance covers the unexpected loss of a key employee. This could be due to resignation, illness, or because the employee passed away.
Visiting bizassured.co.uk reveals why key man insurance is vital for continued business operations today. Often called key person insurance, these policies provide crucial protection at vulnerable moments.
Key man insurance provides businesses with financial help when an essential employee is no longer available to work. When a vital worker leaves a company it can create a void. While recruitment will help to replace the employee eventually, businesses can be severely disrupted in the meantime.
Losing top salespeople for instance will hamper lead generation and revenue. If a project manager passes away midway into an important program, progress will be hampered. Project launches and development may have to be put on hold also.
Why do companies need key man insurance?
You may wonder why this type of insurance is so important. After all, employees leave companies all the time. Recruitment agencies and headhunting can replace workers usually.
However, most companies have one or more employees that are invaluable. These key personnel are intrinsically linked to the success and profits of their employers. The loss of certain executives, CEOs, or head designers, would affect business operations greatly.
Key man insurance is needed to cover a number of potential issues that will arise when essential personnel are lost. The payout from key man insurance will help revenue loss certainly. But, holding key man insurance is essential for many other reasons.
Loan and debt repayment
The pandemic exposed the financial fragility of UK businesses. Thousands of companies shut down during Covid never to reopen. It is said that perhaps 50% of small businesses have just 27 days worth of cash reserves. If cash flow was hampered, many small businesses would struggle to pay suppliers for more than a few weeks.
And many small businesses have outstanding debts that need servicing. One report from 2021 showed that a third of businesses are highly indebted in the UK. The loss of essential personnel could leave a business struggling to operate resulting in cash flow problems.
Failure to repay loans will lead to a weaker credit score. Plus, relationships with suppliers and distributors may be damaged by late payments. Trust will be lost, and your business’s reputation could be harmed.
Retention of talent and recruitment
Employee morale is boosted when employers show commitment to their workers. Investment in equipment and training helps to retain the best talent and attract new recruits.
Now, the loss of key employees may not be avoidable at times sadly. An essential employee may become incapacitated or hospitalised. Key man insurance will provide a financial blanket for this event. But, holding the insurance policy brings other gains too.
There are many strategies for talent retention that a business can use. You may not have considered insurance before, but key person cover may help you to keep your best talent.
Having key person insurance in place shows how much you value your workers. It also shows a commitment to future company growth. This can help you retain the top talent, and promote your business to potential recruits.
Key employee buyout
Some key personnel may own part of your business. A co-founder for instance would likely have a sizeable share of the company alongside yourself. In the event that this individual leaves, you may need to raise capital to buy out their share.
Some key man policies may have clauses that allow a payout if an important employee is forced to leave.
Builds confidence in customers and partners
Being able to continue operations relatively unaffected will increase confidence in your partners. Shareholders and partners will benefit from your insurance policy too. And customers will continue to be served as normal.
If the key employee was a major shareholder, the insurance payout will help with any necessary buyout of shares. This can help to protect the company from unwanted takeovers.
Contingency plans for succession
Succession planning is necessary for that moment when a business loses its leader or owner. A smooth transition is necessary for a business to keep operating. Understanding succession planning is a vital part of business knowledge.
Key man insurance will help businesses through the transition by providing financial assistance. A successor can be brought into the company when it becomes apparent that forward planning is needed. Key person insurance will provide financial peace of mind that when the moment comes, your succession plan will be fully funded.
Cover replacement costs
Similarly, if any essential member of your team is lost, you will need to replace them. Key personnel aren’t necessarily members of the board. They could be any highly skilled worker who is crucial to a business.
Right now, hiring confidence is high in the UK. But, recruitment still costs a considerable amount. Then there are training costs to consider also.
Key person insurance can’t directly help replace lost employees, but it will cover the cost of identifying replacements and bringing them on board.
Business continuity
All of these benefits listed above are linked to business continuity. What key man insurance does is provide assistance in keeping businesses operational. If an important project halts due to the loss of a skilled worker, revenue may dry up.
The payout from your key man insurance will keep your business afloat while you get things back on track. The biggest benefit of any insurance policy is peace of mind.
Insurance allows business owners to focus on daily operations instead of worrying about potential disasters.
Are there tax benefits to key man insurance?
Depending on the level of cover chosen, key man insurance may have some tax benefits. Premiums made for standard key man insurance aren’t liable for income tax or National Insurance. However, if you increase the level of cover and add additional benefits you may be subject to income tax. This may be true for any payouts also.
Speaking to a key man insurance provider or tax advisor will help you to understand how you may benefit from UK tax rulings.
Summary
Losing a key worker can impact many areas of a business. Partners may lose faith in your company if you lose your key sales staff. And product launches may be delayed due to a lead designer passing away.
The financial implications are clear. Loss of revenue, reduced cash flow, and debt. But, when business operations are hindered, reputation and trust can be damaged also.
Key man insurance cannot replace important personnel, but it will help your business to operate as normal by providing the funds to do so.