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Key Person Insurance

Key-person Insurance – Protection for your Business

When something unexpected happens to a person, it will not only have an effect on people’s lives in general; it can also cause total chaos for businesses. However, most company owners don’t even stop to consider how the loss of a key employee, business partner or themselves will affect the daily operations of their business.

Some of the effects that can be experienced at a time like this can include missed income opportunities, disruption to the rest of the staff members, penalties and delays associated with late completion of projects, extensive costs associated with having to recruit and train a suitable replacement, late loan repayments or even complete loss of the company.

Taking a Closer Look at Key-person Insurance

Key-person insurance is a form of insurance that protects a company’s financial position against the significant effect of a traumatic event such as disablement or even death of a key person in the business. A key person can be classified as a member of staff, a business owner or any other person whose contribution to the company has been classified as significant.

This type of insurance cover is not a particular type of insurance. Instead, it is the application of life insurance to help protect against any form of risk against a key person or employee. It can be used in conjunction with buy\sell life insurance (also sometimes referred to as business succession insurance), which then covers the change of ownership in the event of the company owner passing away or becoming disabled to the point where they are no longer able to continue working and contributing to the business.

Benefits of Key-person Insurance

In many cases, providing an injection of cash to an affected company can prevent a bad situation from becoming worse over time. Insurance proceeds may then be used to do the following:

  • Minimising or eliminating the potential loss of income, profits and sales
  • Covering the often exorbitant costs associated with finding, recruiting and training a replacement person
  • Servicing or repaying any forms of debt that have been called in
  • Covering the impact of a write-down in the goodwill of the company
  • Providing much-needed liquidity when other assets may be frozen
  • Retaining existing employees and helping to maintain supplier relationships

Are Any Alternatives Available?

Although a company may have other strategies in place that will help them manage their risks, including the sale of assets, promoting employees or reallocating workloads temporarily, utilising profits, borrowing additional funds or even drawing down on existing loan facilities, having the appropriate form of insurance in place is the only viable alternative if they don’t have the financial capacity to cover their risks.