Running a business right now isn’t easy. Costs are rising, margins are tightening, and many SMEs are feeling the pressure. It’s natural to start reviewing expenses and ask, “What can we cut?” Key person insurance is often one of the first things questioned.
On the surface, it can seem like an easy saving, as you’re paying for something that might never happen. But that thinking can be risky. In reality, cutting this cover could end up being far more expensive than keeping it.
At its core, insurance is really just about having a safety net. It’s there to help you handle the “what ifs” without taking a major financial hit. For businesses, that kind of backup becomes even more important when things feel uncertain, and there’s less margin for error. And in times like these, many businesses end up relying more heavily on a smaller group of people to keep things moving, whether that’s bringing in revenue, managing key clients, or holding everything together day to day.
When so much depends on just a few individuals, losing one of them can hit a lot harder, which is why having something like key person insurance in place matters more than ever.
Why Businesses Cut Insurance in Tough Times
When cash flow is tight, businesses go into survival mode, as highlighted by ScotPac. Spending is reduced, and anything that doesn’t feel immediately essential is reconsidered, with insurance falling into that category, particularly if you’ve never needed to claim on it. But the challenge is that tough times also mean there’s less room for error. The obligations your business has still need to be covered, such as fixed costs like wages, rent, fuel, stock, and loan repayments.
If a key person is suddenly lost, the pressure increases significantly. Revenue may drop, operations can slow, and decision-making becomes harder. Without a financial buffer, the impact can be difficult to manage.
How Economic Uncertainty Increases Risk
As a general rule, many SMEs rely heavily on a small number of individuals, or key people. A key person might manage major client relationships, maintain workplace culture, hold critical knowledge, or drive a large share of revenue.
If that person is no longer able to work, the effects can be immediate and crippling. Clients may lose confidence, projects can stall, and the team may struggle to maintain momentum. The real kicker? Replacing them isn’t always quick or easy. Hiring skilled people can take time, especially in a slower market. Even once hired, it takes time for someone new to fully step into the role.
At the same time, businesses often have reduced cash reserves during downturns. As highlighted by OECD, access to funding may also be tighter, with lenders being more cautious in uncertain times. The combination of these two factors makes it difficult to absorb unexpected
shocks.
What Key Person Insurance Actually Does
Key person insurance is designed to help businesses handle exactly this kind of disruption we
spoke about above. Rather than being a “just in case” cost, it acts as a financial safety net to
keep you afloat.
A policy payout can help by:
● Covering ongoing expenses like wages and rent
● Funding temporary staff or external support
● Offsetting lost revenue
● Meeting debt obligations
Most importantly, it gives business owners time. Time to find the right replacement, stabilise operations, and make thoughtful decisions instead of rushed ones.
Why Paying for Cover Is Worth It
While insurance premiums can feel like just another expense, they’re better viewed as protection against the unexpected. In uncertain times, having that protection in place can make a significant difference in not just maintaining productivity but keeping the doors open in general. Knowing your business has a buffer allows you to focus on managing current challenges without worrying about worst-case scenarios.
In addition to considering a key person insurance policy for your business, it’s also worth speaking to a financial professional. They can help tailor a policy to suit your business, ensuring you’re not overpaying while still being properly covered. Many owners find that the cost is more
manageable than expected. Advisers who specialise in key person insurance can often identify smarter ways to manage premiums without leaving the business exposed.
Cutting costs is part of running a business, especially in difficult periods. But not all costs should be treated the same. Instead of focusing only on what you can cut, consider what your business can’t afford to lose. Key person insurance isn’t just an expense; it’s a way to protect the stability and future of your business when it matters most.
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