Who is a key person?
Your business likely has one or more key persons whose skill, knowledge, experience and leadership are critical to success of the business and whose exit is likely to have adverse financial impacts.
The most common example is a key employee who is directly responsible for bringing in sales. The following are also examples of key people:
- Business Owner: whose expertise, ingenuity and abilities enable the company to run smoothly, and within budget
- Financial Controller: who has set up a new budgeting and reporting system that has already saved the company money, and will continue to do so as it is developed further
- Computer Programmer: who has been contracted to write a software program that the company can sell in the market
- Specialist Engineer: whose specialist knowledge enables the company to win contracts
- Working Director: who does the work of two employees, but only draws a moderate salary, so that more money can go back into the business
- Silent Partner: who was brought in as a partner because of their reputation with financiers, and the credit the business can access as a result.
The benefits of key person insurance
There are three key areas that may be impacted by the unexpected loss of a key person:
Revenue protection
The loss of a key person can have an adverse effect on profit, due to increased costs or lower revenue. Key person insurance proceeds are designed to offset the loss of revenue that the key person would have generated and/or to pay the extra costs incurred in finding and training a suitable replacement. Either way, the profitability of the business can be maintained, and the business stabilised. The specific ways profitability can be affected are:
- Decrease in sales/revenue
- Recruiting costs
- Training costs
- Destabilisation of the business.
Debt protection
Consider the impact of the loss of a key person on loan accounts, personal guarantees and other debt. Key person insurance provides the business with proceeds which can be used to repay debts, easing the financial burden on the business at a critical point in time.
For example, in the case of a business where a business loan has been secured with the family home, key person insurance can be vital in ensuring this personal asset is protected should there be an unexpected loss of a key person that affects the business ability to repay the loan.
Equity ownership protection
If a shareholder dies, their equity may pass to their family who may not be actively involved in the business. This can pose significant challenges and impact day-to-day operations. A buy/sell agreement and appropriate insurance funding can help avoid this situation by providing the business with funding to buy out the deceased shareholder's family.
A solution tailored to your needs
We follow a structured process to help you align your people strategy with your overall business goals:
