A key person insurance will give a monthly benefit to a business for up to a year in the circumstances that the owner or key person is incapable of working due to illness or injury. This benefit will help with the ongoing expenses of the business.
Who is the ‘key person’?
The key person is anyone directly associated with the business whose loss could financially impact the business detrimentally. This could be the owner of the company, a partner or an employee with specific skills that are valuable to your business.
Impacts of the loss of a key person
- Revenue and profits may fall.
- It will take money to find someone to replace the key person. Also, the new employee may need a few months to become fully effective.
- Liquidity and credit may be affected. Creditors can be quick to ask for a payment, debtors can be slow to pay and lenders can feel hesitant to say yes to a business after the loss of a key person.
What can key person insurance protect?
If the key person becomes disabled or passes away, or cannot work for a long period of time, this could affect the capital or revenue of the business. Thus, it is worthwhile to understand the difference between the two insurance purposes.
The business should document the purpose of the key person insurance, whether it is a revenue or capital purpose.
If the business is very dependent on the key person when it comes to generating income, then insurance for revenue purposes should be considered. The purpose of the insurance would be to protect the business against any loss in revenue, or increased costs that the loss of the key person has caused. An example would be employing and training replacements for the key person.
If the key person makes a significant contribution that affects the capital value of the business, the key person insurance would protect the business through the provision of capital. Examples of capital purposes that the insurance can protect are business loans, credit ratings and goodwill.
When figuring out if key person insurance is suitable for your business, it is important to ask yourself whether your business would be able to maintain its revenue and profits if one of your ‘key person’ died or could not work for an extended period.
When considering these financial risks, we can find the best options for your business. Contact Wagtail Wealth today to see if key person insurance is suitable for your business.
IMPORTANT NOTE: This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.