Insure the key people in your business
There are many different types of insurance that a small business owner has to consider. Some are compulsory, such as public liability and workers’ compensation. Neglecting other types, such as comprehensive motor or fire insurance, can be disastrous for a business but there is also a third type of insurance that unfortunately too many small business owners ignore – Key Person insurance.
In general, Key Person Buy/Sell insurance can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for relevant losses and facilitate business continuity.
An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.
What types of losses can key person insurance cover?
There are four categories of loss for which key person insurance can provide compensation:
- Losses related to the extended period when a key person is unable to work, to provide temporary personnel and, if necessary, to finance the recruitment and training of a replacement.
- Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialised skills or knowledge.
- Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners.
- Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.
Who can be a key person?
A key person can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company.
How much should I cover my key person for?
To work out how much cover is needed you must first work out how much the business is worth. If you don’t know this your accountant should be able to provide guidance. Alternatively, we can assist in helping you to establish the required amount to meet your needs.
How much does it cost?
Premiums vary according to many factors including your age, smoking status, occupation and current health. We can provide quotes through a range of high quality insurers and find you the policy that most suits your needs and budget.
Give us a call on 07 3812 7122 to get a quote or to book an appointment.
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