Have you got a key person in your business?

If that Key person got run over by a bus or had to take 6 months or more off work due to sickness or accident, how would you cope?

The most valuable asset in any business, whether a newsagent or a multi-national Corporation is the key people who run the business, or produce a large part of the revenue.

While material assets such as plant and equipment can be replaced relatively easily, this is not the case with human assets, especially key people.

The loss of the managerial skills, sales expertise and leadership of a key person can have a substantial impact on revenue and profitability. Considerable costs can be incurred in recruiting and training a suitable replacement and there may also be an adverse impact on the business’s goodwill and its ability to repay debts or other expenses.

By taking out key person insurance, you can help fund the loss of a valuable employee (including a business owner in certain circumstances) by providing an injection of cash for a revenue or capital purpose.

How does the strategy work?

A key person is someone whose contribution is considered vital to the ongoing success of a business. The purpose of key person insurance is to protect the financial position of the business by providing a lump sum payment to offset the estimated losses that would arise upon the death, total and permanent disablement (TPD) or critical illness of a key person.

Key person insurance may be used for a revenue purpose (to protect against loss of income and profits), or a capital purpose (eg to provide capital to repay business debt). Other options may be available to protect your business, such as drawing on savings, borrowing money or selling assets. However, all of these options are costly and some may not be feasible. Key person insurance can be a less expensive and more convenient alternative.

Talk to your adviser about key people in your business.