Any business, but especially a small one, can be vulnerable to losing a key person in its operations, whether permanently or for an extended period. This could be the owner or founder, but equally it could be someone in a crucial position who has knowledge and experience that would be difficult to replace.

Losing a person like this to serious illness or death can be terminal for the business. If this is the owner, for instance, it could prove impossible to afford the costs of bringing someone in to run the company. This would be devastating both for the lives of the owner’s family and for employees and customers.

This is why insurance companies offer Key Person Insurance (traditionally referred to as Key Man Insurance). This means that, if the crucial person dies or is incapacitated, the business can make an insurance claim to help it survive the crisis.

How Does Key Person Insurance Work?

Anyone involved in the business can be designated a Key Person, and you can have as many as you like — though, of course, a separate premium will have to be paid for each. If this person should unexpectedly die or develop an illness recognised by the insurer’s Loss Adjuster as a critical illness, the business can make an insurance claim.

The normal result will be a lump-sum pay out. This would, for instance, allow you to recruit a new person with the required expertise, or perhaps pay for training an existing employee to fill the role.

It’s important to be clear exactly what the policy does and doesn’t cover. For example, a policy may be just for critical illness, or it may offer life and critical illness cover. In the latter case, it’s also important to bear in mind that this isn’t the same thing as personal life cover. The Key Person may need a separate life policy, especially if they have a family. Your insurance broker should explain exactly what you’re insured for.