Keyholder protection – Insuring business resilience 

If the most critical person within your company was to be incapacitated tomorrow, what impact would it have on your business?  

For many businesses this scenario is their worst nightmare, in fact, previous research conducted by Legal & General suggest that as much as 59 per cent of small and medium-sized businesses would fail within 12 months of losing a key person.  

Whilst many firms have some kind of loose continuity plan in place, should the worst happen, they often aren’t financially prepared for the shock. 

Given the lessons learned from the crises of the last decade, it's surprising that only 12 per cent of businesses have some kind of keyholder, also known as key person, insurance in place. 

If you are reading this with some concern about whether your own business would survive without you, then now might be the time to start exploring the benefits of putting a policy and procedures in place. 

What is keyholder insurance? 

Sometimes also referred to as key man insurance or key woman insurance, the policies give you the option to insure your business against any potential financial losses as the result of a commercially critical individual.  

This might include:  

• Chairperson or Chief Executive 

• Chief Financial Officer  

• Managing Director or Managing Partner  

• Marketing Director or Manager  

• Sales Director or Manager 

Typically, it's a person who contributes a significant amount to the ongoing financial success of your business thanks to the knowledge, insight or leadership that they bring to the business.  

Most policies will pay out to the business if the insured person dies or becomes unable to work due to a critical or terminal illness.  

Some policies will be quite specific about the type of financial loss suffered, but normally it will include any event that causes:  

• Customers to leave the business  

• Lead suppliers to lose confidence  

• Creditors to request early repayment  

• The business to need to recruit or train a replacement  

• A direct loss of profits 

There are other scenarios beyond this limited set of examples that may also be considered, but it will depend on the policy you agree with your insurer.  

How is keyholder cover calculated?  

It's important to ensure that the policy you create covers the effective loss of that person within the business.  

Businesses have found themselves underinsured in some scenarios as a means of cutting the costs of a policy. A decision that they later regret.  

You will need to consider what the loss of a key person really means for your business, including the costs of finding a replacement and the direct impact on your profitability in near and medium term.  

To begin with, you should identify who the key persons in the business are and how they contribute towards its success.  

Then you can use common formulas to calculate the amount of cover required. Here are some examples of ones that we typically see when advising clients:  

• Up to X times the share of net profit attributable to the key person 

• (Key person’s salary ÷ total business payroll) × gross profit × recovery period, typically capped by a certain period  

When considering the costs of a policy on the business, you may want to consider the potential tax relief available.  

Premiums you pay can usually be claimed as a business expense. This means they are deducted from your company profits, reducing your Corporation Tax bill each year. 

However, any money paid out under the policy would then count as business income, which could increase your Corporation Tax bill in the year the payout is received. 

Make your business more resilient  

If you currently do not have keyholder or key person insurance in place, like many SMEs don’t, we highly recommend that you consider putting the right policies in place.  

Derisking your business can be an essential part of protecting your personal wealth, especially where your company constitutes a large part of your net worth.  

How can we help

At Lubbock Fine Wealth Management, we can help you identify the key individuals within your business, assess the financial risks of losing them, and design a protection plan that safeguards your company’s future.

Whether you need advice on the right level of cover, support calculating potential exposure, or help navigating policy options, our experienced protection specialists can guide you through each step. Get in touch with Director, Andrew Tricker (andrewtricker@lfwm.co.uk) for a confidential discussion. 

*This blog post has been written by Lubbock Fine Wealth Management (LFWM). The opinions and views expressed are those of LFWM and do not necessarily reflect 
those of Lubbock Fine. All information provided in this blog is for informational purposes only and should not be considered professional advice. LFWM is not 
responsible for any actions taken based on the content of this blog.