Key Person Insurance

Key Person insurance protects a business from the adverse economic effects of suddenly losing a key person.

Who is a Key Person?

Most businesses insure their machinery, cars and buildings, but on their own, these assets cannot produce profit.  It is the human asset, which through initiative, skill, expertise, knowledge and ingenuity can turn capital and assets into profit.

A key person can broadly be defined as someone whose continued association with a business provides that business with economic gain. Economic gain does not just mean profits. Economic gain can also include cost savings, capital injection, goodwill, access to credit, access to customers, etc.

Why is Key Person insurance needed?

Losing a key person can have an adverse effect on the profitability or capital value of the business. Protecting the business with Key Person insurance replaces the lost profit or capital value, stabilising the business until a suitable replacement is found and operating proficiently.

1. Profitability/Revenue

The loss of a key person can have an adverse effect on profit because of higher costs or lower revenue. Key Person insurance proceeds are used to replace the revenue that person would have generated, or to pay the extra costs incurred in finding a suitable replacement.  Either way, the profitability of the business is maintained and the business stabilised. Some specific ways profitability can be affected are:

•      Sales/Revenue
•      Recruiting Costs
•      Training Costs
•      Destabilisation

2. Capital Value

The loss of a key person can also have an adverse effect on the capital value of the business.  Key Person insurance proceeds are used to maintain the capital value to stabilise the business. The following are specific ways the capital value can be affected:

•      Goodwill
•      Credit Standing
•      Loan Accounts
•      Other Debts