Insuring against a key person being unavailable for months

Aug 29
3 min read

Updated: 3 days ago

Introduction

One person holds the customer relationships, knows how the work is actually done, and makes every decision that matters. If they were unavailable for six months the business would not continue in any recognisable form.

Every small business knows this and almost none of them do anything about it. The building is insured, the vehicles are insured, and the single point of failure that would actually end the business is uninsured, undocumented and unmentioned. It is the largest untreated risk most owners carry.

1. Insuring against a key person being unavailable starts with identifying who that is

Frequently more than one.

The owner is obvious. Less obvious are the person who holds the technical knowledge, the one every customer asks for, and the one who knows how the systems work. Losing any of them may be as disruptive.

2. Work out what their absence would actually cost

The figure that makes the case.

Lost revenue while relationships lapse, the cost of recruiting or contracting a replacement, the period before that person is effective, and the projects that would stall. It is usually a larger number than owners expect.

3. Understand what key person cover does

An injection of money, not a solution.

It pays a sum to the business on the death or serious illness of a named individual, intended to cover the loss and the cost of replacing them. It buys time and options; it does not replace the person.

4. Consider the debt as well as the trading loss

Frequently overlooked.

Loans personally guaranteed, overdrafts and finance agreements may become repayable or unsupported. Cover sized only against lost profit can leave the business solvent on paper and unable to meet its obligations.

5. Look at shareholder protection separately

A different problem with a different answer.

If a co-owner dies, their share passes to their estate, and the surviving owners may find themselves in business with a family member who does not want to be there. Cross-option arrangements funded by insurance address this and are commonly absent.

6. Reduce the dependency as well as insuring it

The more valuable half.

Documented processes, a second person who can do each critical thing, shared customer relationships, and access that is not held by one individual. This lowers the risk permanently and raises the value of the business.

7. Write down what only they know

The cheapest possible mitigation.

Supplier arrangements, pricing logic, system access, informal customer understandings, and the exceptions that exist nowhere. An afternoon spent capturing this is worth more than most insurance.

8. Make sure somebody else can access the essentials

The practical crisis.

Banking, systems, contracts, insurance details and passwords. Businesses have been paralysed for weeks because nobody could access the accounts, and the arrangement to prevent that is simple and must be made in advance.

9. Take advice on the structure and the tax

Where it is easy to get wrong.

Who owns the policy, who pays the premiums, who receives the proceeds and how it is treated for tax all vary by jurisdiction and by structure. A policy arranged carelessly can produce an unexpected liability or pay the wrong party.

Review it as the business changes, because the key person is not always the same. As a business grows the owner may become less critical and a senior employee more so, and cover arranged five years ago frequently names the wrong risk.

Conclusion

Address the single point of failure that would actually end the business.

Identify everybody whose absence would be critical rather than only the owner, calculate what a prolonged absence would cost including recruitment and lost relationships, understand that cover buys time rather than replacing the person, size it against debt as well as trading loss, arrange shareholder protection separately where there are co-owners, reduce the dependency through documentation and cross-cover, make sure somebody else can access the essentials, take advice on ownership and tax treatment, and review who the key person actually is.