Business owners seldom think twice about the need for insuring the physical assets of their business, but often overlook or struggle with the concept of insuring their key personnel. Key personnel could be defined as;
o Someone with specialised skills or knowledge in your business
o The founder or public face of the company
o The creator of unique intellectual property – software, key adviser, major account / sales person
o Someone with responsibility for a significant portion of revenue / profit
The death or disablement of a key person can affect a business in a number of ways:
o Lost profits otherwise generated by the key person
o Additional costs to secure and integrate a replacement
o Loss of contracts and customers
o Loss of market share as competitors "fill the void"
o Ability to stay solvent, potentially breaching The Company's Act
o Ongoing stress for the remaining proprietors / staff
o Loss of company value
Key Person cover is designed to inject cash into the business to provide funds to secure a replacement, replace or reduce lost profits, reassure customers and creditors that the business is financially secure and to meet contractual obligations. Without Key person cover the business may be forced to wind up or face a significant reduction in its value. Statistics tell us that;
o 1 in 5 businesses have to be wound up or cashed up if there is an event which affects a key employee.
o In a forced sale business assets realise approximately 35% of the owner's perceived value.
Debt cover may have been effected on the life of the key person by the business, once a claim has been made and debts repaid this may make funds previously used to service debt available to meet key person needs that may have arisen.
As any sole trader will be the key person in their business, their death or disability invariably means the business will not continue. In the event of premature death it would be important to ensure sufficient funds were available to compensate dependants who needed it and in the event of a disability, income protection would be important to secure a replacement cash flow.
Key person policies are normally owned by and paid for by the company. The generally accepted view for limited companies is that the premium is tax deductible and the benefit is assessable. However, if all funds are used within the tax year of receivables for deductible expenses, no tax is payable. Each company must seek advice from their tax adviser on their specific circumstances.
Written by Gerard Tilleyshort