As a business owner, you understand the importance of having the right resources in place to ensure that your business functions smoothly, things happen and that you can meet your financial obligations. No doubt you’ve worked hard to get the right talent in place, the right services, and the right expertise. Perhaps you’ve thought about money worries, but have you considered the impact of not having a key person on the team? Key person insurance provides protection when the unexpected happens and is something that every business should consider ensuring business continuity in the event of an unplanned personal absence.
Andresr, Getty Images Signature, Canva
In this article, we’ll explore the concept of key person insurance, some of the benefits of this type of insurance, and how to procure Key Person insurance (this article is not personal financial or business insurance advice).
What is Key Person Insurance?
Key person insurance is a type of insurance policy that provides compensation to a business when a key business figure (usually an owner, director, or staff member) dies, is disabled, or becomes critically ill. This type of policy is designed to protect businesses from financial losses caused by the death or absence of a key figure. The policy is usually taken out by the business, and the compensation is usually used to cover costs such as: the cost of recruiting and training a replacement, the cost of lost contracts or key clients, the cost of lost employee production or customer service levels, etc.
Benefits of Key Person Insurance
Here are just some of the ways key person insurance can be beneficial:
Protect Your Investment: When you start out with a business, you invest your time, capital, and energy into making it a success. It has taken hard work and sacrifices. Key person insurance can help to protect your investment, as it will enable you to cover any losses resulting from the death or critical illness of a key figure.
Ensure Business Continuity: Losing a key figure can be disruptive and devastating for any business, as it could take some time and resources to find a replacement. Key person insurance helps to ensure business continuity as it provides a financial safety net to cover this period and its associated cost to the business.
Minimize Risks: with Key Person Insurance, businesses can minimise risks associated with the death or illness of a key role player in the organisation. This enables businesses to continue to operate with minimal disruption.
Access to New Markets: Key person insurance can also provide businesses with access to new markets, as it can demonstrate to lenders and investors that the business is well prepared for the unexpected.
How to Buy Key Person Insurance
Despite the many benefits of key person insurance, many businesses fail to get it in place. To ensure your business is protected, here are some tips on how you can buy key person insurance:
Identify the Key People in Your Business: Before buying key person insurance, you need to identify who in your business is the most important person, or people. This could be an owner, director, or key staff member.
Calculate Your Business’s Losses: Once you’ve identified the key people, calculate how much money your business may lose in the event of their death, disability or critical illness. This will help you to determine how much coverage you need for your key person insurance policy. Loss of sales revenue, cost of replacement of such a key person.
Shop Around for the Best Policy: Shopping around for the right policy is essential, as different insurers have different rates and packages. Be sure to compare lifetime costs and coverage when choosing a policy.
Review Your Policy Annually: Once you’ve purchased a policy, remember to review it periodically to ensure that the coverage meets the needs of your business. It may be necessary to adjust the policy as your business evolves.
Key person insurance is an essential tool for any business owner, as it can help to minimize risk, ensure business continuity, protect investments, and even open up new markets. By following the tips outlined above, you can ensure that your business is properly covered in the event of the death or critical illness of a key figure, and that your business is well-prepared for the unexpected.
Resolute Wealth Management offer a free service to clients for a standard Key Person Risk analysis and proposal. Contact your Wealth Manager to discuss your business insurance needs.
Refer to Momentum Key Person Summary for additional reading.