Insurance comes in many forms and plays a key role in protecting your business. Of course, you can take out insurance to protect your premises, and its contents, to cover any vehicles used during the course of your business, and to protect against action brought against you by a dissatisfied customer. However, one important type of business insurance that is often overlooked is Key Person Insurance.
A businesses’ greatest asset is its employees, and all businesses would fail without a skilled and conscientious workforce. The loss of a skilled and experienced senior staff member due to death or serious disability could have a catastrophic effect, impacting greatly upon turnover, and having negative consequences for the future of the business itself.
Key Person Insurance protects a business against the loss of a valuable employee; one whose departure could result in financial setbacks and great instability. In the event that a key member of staff dies, or becomes unable to work, the policy will pay out either a lump sum, or a monthly benefit which can be used by the business in a number of ways.
Firstly, the funds could be used to source, employ, and train a suitable replacement for the employee who is lost. Secondly, the money could be used to replace the organisation’s depleted profits, and thirdly, the payout could be used to repay any debts that have accrued since the key person’s departure.
With regard to the key person they can be employed by the company in any role, for example, the Managing Director, an IT professional, or the company owner. It is important to take into account that the policy is owned by the company, and not by the key person themselves; they would not receive any financial compensation if they were to become disabled, and nor would their family if they were to die. Most often than not death benefits are exempt from corporate income taxes, but the premiums paid for by the business are not tax deductible.
When deciding how much key person insurance is required the insurance provider will look at the size of the business, any outstanding debts, and the potential loss to the business before a suitable replacement is found. In general, most policies offer between $500,000 and $1 million worth of cover. Premiums vary considerably and are based upon the age of the key person, their physical condition, their past medical history, and the structure of the company. Calculating an accurate figure of how much an individual is worth is difficult; most insurance providers reply upon a number of methods to deduct this figure including the replacement cost method, the contribution to earnings method, and the multiples of income approach, to gain an accurate figure of how much key person cover is necessary.
Key person insurance works primarily in two ways. If the individual insured is also the business owner and they die, or are unable to carry on working due to ill health, then the payout can be used to purchase their share of the business. Most policies include detailed instructions with regard to buy/sell agreements in the event of the death or serious disability of the business owner, or shareholder. Alternatively, if the key person suffers an episode of sickness, but is expected to be able to return to work then the policy will pay out on a monthly basis to cover the cost of hiring a temporary replacement for the key worker, or to finance lost profits.
Key person insurance policies are often used as collateral when applying for a business loan; funds from the policy would be used to pay off any remaining balance owed if the key person were to die during the loan term. In fact, many banks and other financial institutions insist that key person insurance is taken out for specific members of the business before offering credit.
In order to keep a business safe insurance is a necessity, in particular, key person insurance. A successful business relies upon the skill and dedication of its senior employees; without one, or more of them, the business can suffer in a multitude of ways. The sudden absence of a key worker can have a devastating impact upon finances, general stability, and the company’s relationships with its clients. Key person insurance allows a business to recruit and train a replacement employee, pay off business debts, and buy shares in the company if required. Some companies even turn over the cash value of an unused key person insurance policy to the employee upon retirement which can act as a great incentive for key workers to remain with the company. By insuring their most valuable asset, their employees, business owners can safeguard the financial future of their company and ensure that it remains successful, even if the worst were to happen.
It pays to consult an experienced insurance broker before taking out a key person insurance policy to ensure that you secure coverage that best suits the needs and requirements of your particular company.