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Key Person Cover

Key Person Cover to protect debt

Losing a key person can be disastrous for the long-term survival of a business, large or small, and although clients can’t predict the future, Key Person Cover can protect against being unable to repay creditors and investors.

The example below shows how Key Person Cover can be used to help clients who want to secure the repayment of a business loan if something happened to one of their key employees. Please note that this is an example only and is not based on a real company.

Nicole

Nicole
Employee/Key Person

MN Engineering LTD

The company takes out a business loan and the shareholders want financial protection to help them pay back the debt if Nicole, who is key to sales, were to suddenly die or be diagnosed with a serious illness.

Mark and Sam

Mark and Sam
Shareholders

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Scenario 1

The company takes out Key Person Cover on Nicole's life to cover debt repayments.

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  1. Nicole is involved in a car accident and dies.
  2. The company makes a claim and the £150,000 benefit is paid straight to the business.
  3. The money is used to clear the business loan.
  4. The proceeds give the company (and owners) the breathing space and time they need to come to terms with the loss to the business and find Nicole's replacement.
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Scenario 2

The company doesn't take out Key Person Cover (for debt).

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  1. Nicole is involved in a car accident and dies.
  2. Sales are impacted immediately and the company are unable to pay back the loan.
  3. The bank calls in the debt and instruct the company to pay back the loan in full.
  4. The company are unable to pay back the loan in full.
  5. The business ceases trading.

Background

  • Clients - Mark and Sam
  • Joint shareholders in a limited company
  • Business loan of £150,000
  • Single key person integral to new business

Mark and Sam are shareholders at MN Engineering Limited, a growing business specialising in high precision components for the defence and automotive sectors. They both manage the day to day running of the business and also employee a sales manager, Nicole, who brings in the majority of new business. They want to expand and invest in more equipment but due to a lack of available funds, they need to take out a business loan of £150,000.

Mark and Sam realise how important Nicole is to the company’s long-term survival and understand if she were to die, or be diagnosed with a serious illness, the business would be at real risk of defaulting on the loan due to the impact on the business Nicole brings into the company.

Key Person Cover solution

Concerned, they speak to their financial adviser who, after checking the LV= Business Risk calculator recommends that they take insurance to cover the loan. They take out Key Person Cover for £150,000 with LV= (which equals the original amount of money lent by the bank) on a ‘life of another basis’ with MN Engineering Limited as the policy owner. LV= would pay the cover if Nicole dies, or is diagnosed with a critical illness shown in the policy conditions.

In this example, Mark and Sam felt they didn't need to protect future profits. To find out more read our case study for small business profits.

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