1. Confusing Key Person Cover with Shareholder Protection

One of the most common misconceptions is mixing up key person cover with shareholder protection.

• Key person cover is specifically designed to protect the business from the operational and financial consequences of losing a vital team member. The company pays the premiums, and any payout is used for the business's benefit. This policy ensures the company receives a lump sum payment to cover costs such as covering overheads, recruiting a replacement member, training, or even mitigating revenue loss. 
• Shareholder protection, on the other hand, is designed to secure the ownership structure of the business, enabling  surviving shareholders to purchase the shares of a deceased or critically ill shareholder. This way, current shareholders can maintain control and continuity of the business. Without it, shares could end up in the hands of family members or third parties who may lack the expertise or interest in the business.
  
  

Using key person cover as a substitute for shareholder protection - or vice versa - can leave significant gaps in your business’s risk management strategy. Key person cover is not designed to buy out shares, and attempting to use it in this way could result in disputes, financial strain, and operational risks. These are two distinct types of insurance, each with its own purpose and benefits.

2. Overlooking Key People in Your Business

One of the most significant mistakes businesses make when setting up key person cover is failing to identify all the key individuals within their organisation. While directors and senior executives often come to mind first, the reality is that many other roles can be just as crucial to the smooth running of a business.

While it’s natural to consider the contributions of leadership roles, other employees may play an equally pivotal part in your business’s success. For instance:

• A star salesperson might be driving a substantial portion of your revenue through their client relationships and performance.
• An IT specialist could be the linchpin of your technical operations, maintaining infrastructure that keeps the business running.
• A project manager may oversee key initiatives, ensuring deadlines are met and client expectations are fulfilled.
• An office manager might be the glue holding day-to-day operations together, ensuring the business runs efficiently.
  
  

Evaluate the impact of losing employees in various roles and ensure all essential team members are covered, not just the leadership team. When determining who should be covered under your key person policy, consider the following questions:

• Revenue Impact: Does the individual directly generate significant revenue or contribute to its growth?
• Operational Dependency: Would their absence disrupt key workflows, customer relationships, or project timelines?
• Replacement Difficulty: How long and costly would it be to find and train a suitable replacement?
• Unique Skills: Does the person possess specialised knowledge, skills, or relationships that are critical to your business?

It’s important to look beyond job titles and evaluate roles based on their contribution to the company’s success. Where possible, involve department heads in the process to identify key individuals in their respective areas. As your business evolves, the roles considered “key” may change. Regular reviews of your policy will help ensure all critical individuals are accounted for.

3. Miscalculating the Amount of Cover Needed

Another critical mistake businesses often make when setting up key person cover is underestimating the amount of cover required. Many companies default to basing the cover on the individual’s salary, but this approach often overlooks the broader financial impact that the loss of a key person can have on the business. While an employee’s salary reflects their compensation, it rarely accounts for their true contribution to the company’s success. 

For example:

• A salesperson with a modest base salary but generating millions in revenue would need a cover amount reflecting their true impact on the business.
• Factors like recruitment costs, training expenses, business interruption and potential loss of client relationships should also be factored in.
  
  

How to calculate accurate coverage:

• Revenue impact: Determine how much revenue the individual directly or indirectly generates.
• Recruitment costs: Factor in recruitment costs and advertising, hiring and training a replacement.
• Business interruption: Consider the cost of business interruption, including delayed projects, lost clients, or downtime.
• Business Growth Plans: If the individual is integral to expansion or innovation, calculate the potential cost of delaying or scaling back these plans.

Work with a financial adviser to calculate the appropriate cover for each key individual based on their actual value to your business.

4. Failing to Review and Update Coverage Regularly

A common oversight in managing key person cover is neglecting to review and update the policy regularly. Businesses evolve over time - roles change, new individuals emerge as vital contributors, and the financial impact of losing key people may shift. Failing to reassess your coverage can result in outdated policies that no longer align with your current needs.

Annual reviews of your key person cover are essential to ensure it aligns with your current business structure. Staying on track can make or break your business and its key people. Below are the recommended points to always check:

• Annual Reviews: Incorporate policy reviews into your annual business planning process. Assess if the existing cover amounts are still adequate. 
• After Major Changes: Update coverage following significant events like promotions, expansions, or leadership changes. Add new key individuals as the business grows. Remove coverage for roles that are no longer critical.
• Involve Experts: Work with an insurance adviser to ensure your policy stays relevant and comprehensive.

5. Assuming Key Person Cover Only Protects Against Death

A common misconception about key person cover is that it only applies in the event of death. However, the sudden illness or disability of a key individual can be just as disruptive, if not more so, for your business.

For instance, if a key salesperson becomes ill:

• The company may need to pay their salary and commissions during their absence and recovery.
• A temporary replacement might need to be hired, incurring additional costs or workload may need to be redistributed.
• The business could suffer a loss of revenue due to disrupted client relationships and loss in productivity.

Comprehensive coverage

To safeguard against these risks, ensure your policy includes coverage for both death and critical illness. Many insurance advisers, including Remulate Protect, can offer different policies that cater to both scenarios, providing a lump sum payment to mitigate disruption and financial loss. Key person cover isn’t just about protecting against loss due to death—it’s about ensuring your business can weather any disruption caused by the absence of a critical team member, whether due to illness or other unforeseen circumstances.

Why Choose Key Person Cover through Remulate Protect

Key person cover is a powerful tool for protecting your business from the unexpected loss of a key individual. However, it’s only effective if set up correctly. By avoiding these five common mistakes, you can ensure your policy provides the robust protection your business needs.

At Remulate Protect, we understand that every business is unique. Our tailored advice ensures we recommend the most suitable key person cover for your business helping safeguard your business against financial risks of losing a vital team member due to death or serious illness. With various options, expert advice, and comprehensive coverage, we help ensure your business remains resilient, covering recruitment costs, mitigating revenue loss, and maintaining operational stability during challenging times.

Taking the time to assess your needs, calculate accurate levels of coverage, and review policies regularly will help safeguard your business against future challenges. For expert advice and tailored solutions, trust Remulate Protect to guide you every step of the way. Contact us today.

This blog is for information only and should not be seen as advice or a recommendation to take action. You should never cancel a policy before a replacement policy is in place and on risk. We highly recommend that your existing policies are reviewed by an adviser before taking any action.