Key Person (Business) Insurance
Should the business lose a key person, has any potential loss to cash flow or profits been recognised and adequately allowed for?
That is, does the Business have a funding strategy in place in the event of the loss (death/ disability) of a key partner/employee.
Why is key person insurance needed?
All businesses should consider the use of key person insurance to compensate the business for any financial loss or cost suffered because an insurable event (death, trauma or total and permanent disability) has occurred with respect to a key person.
Most businesses take out insurance cover for assets that do not actively make them profits – their plant, equipment, vehicles and buildings. But it is the human asset that, through initiative, drive, skill, specialist knowledge and ingenuity which, can actively generate profit from the business.
Who is a key person?
A ‘key person’ is someone whose contributed association with a business provides that business with a significant and direct economic gain. Economic gain means more than just profits. It can, amongst other things, also include cost saving, capital injections, goodwill, access to credit and access to customers. A common example of a key person is an employee who directly responsible for bringing in sales of who holds the key technical expertise on which a business relies.
The owners of the business will usually be key people. While the following list is not exhaustive, a key person could also include a:
- Managing director – whose expertise, ingenuity and ability enable the business to run smoothly, operate within budget and establish a strong market presence.
- Sales manager – whose unique contacts or business methods give the business a competitive edge.
- Financial controller – who has set up a budgeting and reporting system that has saved the business money, and will continue to do so as the system develops.
- Computer programmer – who has been contracted to write a software program that the business can on-sell and who the business may later contract to maintain.
- Specialist engineer – whose knowledge enables the business 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 – whose strong reputation with financiers allows the business to access more, or better financing.