Many business owners insure against damage to physical business assets and have workers compensation and professional indemnity/public liability insurance. However, for many businesses the most important assets of the business, the key people, are unprotected.
A Key Person is someone whose inability to work is likely to result in reduced revenue coming into the business. This may be an owner, but may also be a key employee. The business is the policy owner that takes out the cover over the key person.
When a Key Person dies, is injured and unable to work, or suffers a critical illness, this temporary or permanent loss can create immediate problems for the business, which may manifest themselves in one or more of the following ways:
- profitability is adversely affected;
- additional capital may be required to recruit and replace the lost key person;
- business efficiency is lost; or
- the goodwill in the business is lost.
Depending on the policy, the benefits of a key person insurance policy can include paying a lump sum or monthly payment that can be used to:
- Pay expenses to hire a replacement;
- Repay a loan owed to the key person or external lender;
- Compensate owners for a drop in business value, due to loss of revenue or goodwill; or
- Help transition the business to new owner/s.
It may be difficult to put a value on some of these items, but businesses should try to estimate the costs to determine how much cover is appropriate. Being prepared for an unforeseen event can avoid a potentially disastrous impact on the surviving business partner/s. The existence of an effective business succession plan that incorporates appropriate insurance funding protects your investment and can help to ensure the survival of your business should one of the business owners or a key person die, become disabled or suffer a critical illness.
For a confidential discussion about your personal business needs, please contact your Adviser at DJ Carmichael.
This information is general advice only, which has been prepared without taking account of your objectives, financial situation or needs; and because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.