Key man cover provides protection to a business against the death or long term illness of an employee who is key to the future success of the business.
Protection is no longer necessary beyond the period of the key person’s value to the business. Once the key person is no longer of value to the company, there should be no requirement for key man cover. The aim of such a policy is to compensate the business financially for their loss to ensure the future success of the business. The fixed sum paid out from key man cover is determined by the policy holder when the policy is taken out. This usually relates to the associated income lost through the employee’s absence from work.
Businesses may opt to take out key man cover on an employee if their work or knowledge is considered fundamental their success. The employer may need the policy to cover costs of hiring new or temporary staff or for financial losses as a consequence of loosing a key person.
Case Study
The Bread Boutique is a very popular bakery renowned for their exclusive and exquisite cakes, especially for their wedding cakes. Miss Sugar meets all the clients on a face to face basis and designs and bakes all the cakes herself; including the finishing touches.
The shareholders of The Bread Boutique are aware that the success of the bakery is largely due to the hard work and reputation of Miss Sugar. So much so that 70% of their profits are down to business generated from her weddings cakes.
If anything should happen to Miss Sugar the shareholders of the Bread Boutique have recognised that their profits would be heavily dented along with their reputation. They would also have to recruit and train a replacement which is costly both financially and operationally to the business. In order to deal with these problems the shareholders decide to take out Key Man Cover which would support them financially when doing so.