"If a business owner tells you his business will run itself while he is off, then ask him why he is not at the beach or on the golf course every day instead of running the business. Key people must remain involved for a business to prosper"
What is Key Person Insurance?
Key Person Insurance can provide a timely injection of cashflow or capital to help stabilise your business if a key person dies, suffers a traumatic illness or becomes disabled.
Who is a Key Person?
A 'Key Person' is someone who's specialist skills, experience or drive generate the profits needed for the survival and growth of your business. Be it a business partner, director, sales person or other key employee, your business relies on these key people to generate profits.
Why does my business need Key Person Insurance?
You insure business assets such as buildings, plant, equipment and stock but what about the human asset that use these things to generate profits for you? The loss of a key person can result in :-
- Lost revenue which the key person would have generated
- Extra costs to locate, recruit, train and pay a replacement for the key person
- Loss of goodwill and a significant reduction in the value of your business
- Loss of credit standing and capital value which may result in your bank calling in business loans
Key Person Insurance can help to replace lost revenue and employ a replacement to 'fill the hole' in your business. It can also provide the capital to protect goodwill and reduce or remove debt to stabilise your business and 'keep the wolves at bay'!
How much Key Person Insurance does my business need?
The ATO requires the purpose of key person insurance to be clearly defined and documented as to whether cover is for 'Revenue' purposes (think profit and loss statement) or 'Capital' purposes (think of your balance sheet).
The amount of cover required depends largely on the key person and their exact value to your business, however the following points can be taken into account when determining the level of cover required:-
Revenue Purposes - Determine the potential loss of profit attributable to losing the key person and/or the cost of replacing that key person.
Capital Purposes - How much of the current capital value is attributable to the key person and how much of this value would be eroded upon the loss of that person? Will the bank call in any loans? Have any loans been made to the business by the key person? Are any debts personally guaranteed by the key person?
We are able to assist you in determining the level of cover you require.
