When you own or manage a business, you have a responsibility to ensure that your company can continue to prosper & succeed, no matter whether the key members whom you rely on are present or not. Obviously, if someone were to become unwell or pass away and they are a key person in your business, there are implications for all involved from an emotional perspective. However, the financial implications on your business, can be much wider reaching.
Key Person insurance (previously known as key man insurance) is a type of Corporate-owned life insurance which insures an employer against the death or incapacity of a key employee. It is used by both large companies and small partnerships alike.
An employer may take out a Key Person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer may suffer in the event of the loss of a key person.
There are several important categories of staff that should be considered for Key Person coverage:
Insuring important sales staff
Some people are born to sell. It is a lucrative and vital talent that most businesses require in some capacity or another. Larger companies are often lucky enough to have several key salespeople on board, and this helps to spread the risk across several people. However in small business, losing a valued salesperson can be paralysing.
Insuring the decision makers
In any business, the decision makers are a critical component to the operation, functions and profitability. Decision makers are most often the people who have a vision for where the business is headed. They are ambitious analytical thinkers, and removing them may have more of an impact than anyone can anticipate.
Insuring the money makers
The money makers in any business are greatly variable. This could be the sales people, the administration staff or the executive leadership team who have guided it to profitability. Identify the money makers in your business, and think about the cost of replacing their skills, talent, training or corporate memory.
Insuring the talent & future of your business
This is an often overlooked criteria for Key Person insurance, but the future success of your business does depend a lot on the talent pool that you currently have. Many owners feel that it is the older, established people within the business that represent the greatest risk factors due to age or ill health, but in truth it can be the younger employees who leave the biggest hole, particularly as it is generally assumed that they are in good health and thus contingencies like passing away are not planned for.
Your Business Partners
Finally, (and most importantly) it is imperative in a business with several key partners to ensure the protection of all equity players. Not only is there the potential need to replace that person, but there will be a requirement to pay out the family or Estate of the deceased, or even go into business with this person, which can on occasion have disastrous effects. Insurance allows the remaining partners to payout the beneficiaries more easily. In addition to this, it is also vitally important to ensure Buy/Sell agreements are in place outlining each stakeholder’s plans and desires should one pass away so that the transition can be smooth, or any disagreements with beneficiaries can be more easily settled.
If you would like to chat to an independent financial adviser about Key Person Insurance, please feel free to contact our office here to arrange a complimentary appointment.
Disclaimer:
The information on this site is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions.