Safeguarding Your Construction Business with Key Person Insurance

27 June 2023 - Tim Bell

It’s often said that a business’s greatest asset is its people, and in almost every construction company there will be a number of individuals without whom it would be difficult for the business to succeed. These could be people who are creatively, technically or strategically vital to the day-to-day operations. Without their knowledge and skills the business would possibly lose construction contracts, see a fall in profits, and find it difficult to meet loan repayments. In this article, Tim Bell, Business Protection Consultant, explores the benefits of key person insurance and present a case study illustrating how it has positively impacted a construction business.

Key Person Insurance (sometimes referred to as Key Man) can help protect your construction business if one of these key people were to die or fall critically ill. It is particularly relevant in small and medium sized organisations where one or two people are responsible for generating a significant percentage of the business’s revenue. It can help to offset the financial losses incurred due to the absence, replacement, or restructuring costs associated with losing a key person.

Who is Key to Your Business?

To identify the people key person protection is most relevant to within your construction business, you should look at their skills, knowledge and leadership abilities, and think about the impact – particularly the financial impact – it would have if they weren’t there. Examples of individuals who could be identified as ‘key’ to a construction business might include company directors, people in important management positions and employees who are specialists or highly skilled such as engineers, IT experts and project managers.

When Would Key Person Protection Pay Out?

The policy would be triggered by the death, or terminal illness and sometimes critical illness diagnosis of the key person(s) you have specified. A lump sum would be paid to your business which could be used to help pay off an overdraft or loan, pay suppliers, help to find a replacement or to assist the key person’s family in their time of need.

Benefits of Key Person Insurance to the Construction Sector

1. Financial Protection and Business Continuity
Key person insurance ensures that a construction company can continue its operations smoothly in the event of the loss of a key individual. The policy payout can be used to cover financial gaps, such as finding a temporary replacement, hiring and training a successor, or maintaining cash flow during the transition period.

2. Securing Loans and Business Relationships
Lenders and business partners often look for assurance that a company can sustain itself, even if a crucial person is no longer present. Key person insurance provides confidence to lenders, making it easier for construction businesses to secure loans or establish crucial partnerships.

3. Retaining Skilled Employees
By offering key person insurance, construction companies demonstrate their commitment to the welfare and security of their employees. This can help in attracting and retaining talented professionals who appreciate the additional layer of protection offered by the policy.

4. Protecting Shareholder Value                                                                      In construction companies with multiple owners or shareholders, key person insurance can safeguard the value of their investments. In the event of the death of a major shareholder, the policy proceeds can be used to buy out the deceased shareholder’s shares, ensuring a smooth transition of ownership and stability within the organisation.

Case Study: XYZ Construction Company

XYZ Construction Company, is a mid-sized construction firm specialising in commercial projects. They decided to implement key person insurance to protect their business and ensure its continuity.

The key person identified by XYZ Construction Company was their highly skilled project manager. With years of experience and an extensive network of clients and subcontractors, he played a crucial role in managing projects and securing new business for the company.

Tragically, he suffered a sudden heart attack and passed away. His loss sent shockwaves through the company, leaving a void in leadership and project management. However, since XYZ Construction Company had a key person insurance policy in place for him, they  were able to keep their business going.

The policy provided a substantial payout to XYZ Construction Company, enabling them to hire an interim project manager while searching for a permanent replacement. The funds also helped cover the costs associated with client reassurance, staff training, and maintaining business operations during the transition period.

The key person insurance not only provided financial stability to XYZ Construction Company but also instilled confidence among their clients, suppliers, and employees. The swift response to the crisis and the ability to manage the aftermath seamlessly ensured the company’s reputation remained intact.

Are There any Tax Advantages?

Key Person Insurance is arranged as an individual Life, or Life and Critical Illness policy. It is written on the employee’s life, owned by the company and may be tax deductible if certain criteria are met. These are:

  • The sole reason for taking out the insurance is the trade purpose of meeting a loss of trading income that may result from loss of the services of the Key Person, and not a capital loss
  • In the case of life insurance policies, they are term insurance, providing cover only against the risk that one of more of the lives insured dies within the term of the policy, with no other benefits.

Where both of the conditions above are satisfied, the premiums may be tax deductible, and sums received under such a policy will be classed as income for your construction business.

Any Other Points to Note?

A Key Person Insurance policy is usually written on a short-term basis, typically for 5 years but can extend beyond that period as long as it is not proposed to extend beyond the expected usefulness of the key person. There is no benefit
to cashing in the policy, and if you stop paying premiums your cover will cease.

The example of XYZ Construction Company illustrates how having key person insurance in place can alleviate the financial burden and provide a solid foundation for recovery and continuity. As the construction industry
continues to face challenges and uncertainties, investing in key person insurance is a proactive step that can safeguard the future of your businesses and ensure its long-term success.

Get in touch with Tim Bell, Business Protection Consultant, if you would like to discuss key person insurance solutions available for your construction company and protect the invaluable assets that drive your business forward, by emailing or calling 0330 058 6559.

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