What would the impact be on your business if you lost a key person through severe illness, injury or even death? Would you have the financial strength to replace that key member of your team? Can they actually be replaced? If they can be replaced how much would that cost and how long would it take?
The purpose of Keyman insurance is to shield a business from some of the financial impacts of losing a key member of staff. Usually the smaller the business is, the more susceptible it is to losing a key member of staff, and the less able it is to fund a replacement person from its own resources.
Let’s take a look at a brief case study which compares the outcome with and without Keyman insurance for a small £1m turnover web design agency that employs 8 staff, after the untimely death of the owner and sole Director. This business generates a £150k per annum income for the owner and his young family.
Without Keyman Insurance
Aside from having to deal with the death of her husband, the owners wife has now become the MD of a small web design business. She has no time, inclination or experience for this but is obligated to do so to continue the income for her family and the 8 members of staff. Without the experience and drive of her husband within the business project deadlines get missed, quality suffers, customers are lost and overheads are not cut quickly enough. Ultimately the business suffers from acute cash flow problems and is placed into administration 15 months later.
With Keyman Insurance
The business owner had repeatedly reassured his wife before his death that he had taken out insurance (as well as personally) to make sure she wasn’t landed with a liability should anything happen to him. Upon his death his wife claimed on his Keyman policy and used the funds to immediately appoint an interim MD who had previous experience in the sector. The interim MD reassured customers, steadied the ship and then recruited a permanent MD. The Keyman insurance funds covered the high cost of the interim MD, recruitment costs and most of the incremental costs of the permanent MD for the first 18 months. The net result is the business continued to grow and even after the costs of employing the new MD the business has survived and the family continue to draw an income (albeit smaller) from the business, without day to day involvement.
Continuity Partner Comment
We would encourage all business owners to think seriously about the potential liabilities they will leave behind and the unnecessary stress they will cause their families and staff if they inadvertently leave their ship without a Captain. We have supported numerous companies in this situation and whilst it is never easy to deal with it is so much easier for all if a pot of money is available to fill the management void.