Key Person Insurance
Key Person Insurance is a type of business insurance designed to financially protect your company in the event of the loss of a key employee. A “key person” refers to an individual whose expertise, skills, knowledge, or leadership plays a vital role in the success and profitability of the business.
Key Person insurance forms a vital part of your long-term business succession plan as it ensures the preservation of the business for the continuing owners.
It provides the departing owner or their estate with funds equivalent to the value of the departing owner’s share of the business. This ensures a smooth transition of ownership in the event of death, disablement, or a traumatic health episode of an owner.
Key Person Insurance Cover can be used for various purposes, including:
- Buy-Sell Agreement’s (also known as a Buyout Agreement or Business Continuation Agreement) triggering event: It is a legally binding contract commonly used in businesses with multiple owners or shareholders that provides a framework for what happens to a business owner’s interest in the company if certain triggering events occurs.
- Recruitment and Training: The payout can be used to hire and train a replacement for the key person, ensuring that the business can continue operating smoothly.
- Loss of Profits: The policy helps cover the potential loss of revenue and profits that may occur due to the key person’s absence.
- Loan Repayment: If the business has outstanding loans or debts, the payout can be used to repay those obligations.
- Maintaining Stakeholder Confidence: The insurance proceeds can be used to reassure stakeholders, investors, and creditors that the business can continue its operations despite the loss of the key person.
- Business Continuity: It provides a financial cushion to help the business maintain continuity during a challenging transitional period.
- Protecting Shareholders or Partners: In businesses with multiple shareholders or partners, the policy can be structured to provide funds to buy out the shares or ownership interest of the key person or their beneficiaries.
It’s essential for businesses to carefully assess the value of their key employees and the potential impact of their absence. Key Person Cover can be a valuable risk management tool to safeguard a company’s financial stability and ensure its long-term viability in the face of unexpected events involving crucial team members.
The following outlines the types of Key Personal insurance cover:
|Type of Cover
|Why This is Important
|Life insurance provides a lump sum payment if you unexpectedly pass away or are diagnosed with a terminal illness. This money is used to compensate the departing owner or their estate for surrendering their interest in the business because of death.
|Total & Permanent Disablement (TPD)
|TPD insurance provides a lump sum payment if you can never work again due to illness or injury. This money is used to compensate the departing owner or their estate for surrendering their interest in the business because of permanent disablement.
|Trauma (Critical Illness)
|Trauma insurance provides a lump sum payment if you are diagnosed with a specified medical condition like cancer, heart attack or stroke that doesn’t result in disablement. Often trauma conditions are treatable and there is an opportunity to recover. During this time, a Trauma claim can be used by a business to meet additional staff expenses whilst the owner recovers.
Your circumstances will change so it’s very important to keep up to date with your insurance requirements. As part of our Key Person insurance service, Sterling Grange Financial Planning will continue to review your policies annually to ensure you have the right amount of cover, and the appropriate policy structure in place.