Securing your enterprise from potential risks should be a priority
Running a business involves navigating various challenges, and one of the most important considerations is ensuring that your business is protected against unexpected setbacks. Whether you are an established business owner or just starting out, prioritising the security of your enterprise from potential risks should be essential.
What is business protection, and why is it important?
Business protection serves as a financial safety net that helps your company remain stable in challenging situations, such as the loss of a key team member. It offers financial security to address issues like sudden illnesses, disabilities, or unfortunate events such as premature death. These policies apply to various business structures in the UK, including partnerships, limited companies, sole traders, and more.
While it’s second nature for businesses to safeguard physical property and equipment, protecting human assets is often overlooked despite their critical value. From vital contacts and specialised skills to ensuring business continuity, employees are the backbone of every company. Without effective protection in place, businesses may face significant losses.
Types of events covered
Business protection can help mitigate various risks that could disrupt a business, including:
• Critical illnesses.
• Disabilities that prevent an employee from working.
• The untimely death of a key person.
By putting the appropriate arrangements in place, business owners can safeguard their companies against major setbacks.
Understanding different business structures
Before securing business protection, it’s critical to understand how your business is structured. This understanding not only determines your legal obligations but also influences how protections are established.
What is key person insurance?
Key person insurance is a vital element of business protection. It offers financial compensation to a business in the event of the death or incapacitation of a critical team member. This policy can be invaluable, providing funds that assist the business in recovering from a loss in turnover or in hiring and training replacements.
How does key person insurance work?
When your business takes out a key person insurance policy, you pay premiums regularly to maintain the cover. If the insured key employee suffers a covered event (e.g., death or specified critical illness), the insurer pays out a predetermined sum to the business.
This payout could be used for:
• Hiring and training a replacement.
• Replacing lost profits or revenue.
• Covering outstanding business loans tied to the key person.
• Funding recruitment or consultancy services to maintain operations.
• Stabilising cash flow to sustain day-to- day activities.
While you may never replace the experience or personal value of a key employee, key person insurance ensures your business is financially prepared to deal with their absence.
Why key person insurance matters
Many businesses are heavily reliant on one or more employees who possess specialist knowledge, build supplier relationships, or hold significant roles.
Losing this individual without a financial safety net could lead to severe disruption, including:
• Loss of profits: When sales and operations falter, business finances can take a hit.
• Difficulty securing loans: Lenders may hesitate to approve loans if your business appears unstable.
• Loss of goodwill: Relationships with customers and partners rely on trust, which can be hard to maintain when key individuals leave.
• Recruitment challenges: Finding and training a new staff member can cost you time and money.
• Operational disruption: Institutional knowledge, systems, and workflows can become destabilised when experienced employees are no longer around.
Given these risks, implementing an effective key person insurance policy could be vital for securing your organisation’s future.
Steps to implement business protection for key employees
1. Identify key people
Evaluate your organisation and identify individuals whose contributions are essential to business continuity.
This might include:
• Business owners and directors.
• Senior managers.
• Sales team leaders who generate significant revenue.
• Employees with specialised knowledge or unique skills.
2. Calculate their value
Quantifying the financial impact of losing a key employee is critical.
Consider:
• Their contribution to annual profits.
• The time it would take to replace them.
• The cost of recruitment, training, and temporary cover.
3. Choose the right cover
We can clarify the type of coverage that suits your business needs.
Options include:
• Critical illness cover.
• Life insurance cover.
• Income disability insurance.
Additionally, we’ll tailor your policy based on your business structure, the roles of key personnel, and the risks involved.
4. Review regularly
The challenges your business faces today may differ from those it will encounter in the years to come. Ensure you review and adapt your business protection plan as your company evolves.
Real-life example of key person protection
Consider a successful manufacturing company where one director handles the majority of supplier negotiations. Without warning, the director becomes unable to work due to illness.
With key person insurance in place, the company receives a lump sum payout, which the co-directors use to:
• Hire external consultants to manage negotiations temporarily.
• Train another team member to take on supplier-facing responsibilities.
• Replace the loss of profits arising from the serious illness of a key person
• Contributions to the medical care of the key person
• Potential financial support for the immediate family of the key person
This payout enables the business to remain operational and minimise financial losses during a challenging period.
The most valuable assets are your people
Running a business presents many challenges, yet neglecting the significance of business protection can leave you exposed to serious financial and operational consequences. Key person insurance is an invaluable resource to protect your business from the unforeseen.
Take time to assess your current setup and consider who keeps your company running smoothly. By implementing well-structured business protection, you can ensure a more secure and sustainable future for your organisation. Remember, your most valuable assets are your people, and protecting them is protecting your business.