What is Key Person Insurance?
Key Person Insurance can protect one of the most valuable assets a business owner can have which is a Key Person. This is the right person in the right role who creates a substantial portion of your business revenue, but it can take precious time and money to find the right person for your business.
You may even need to go through a few employees to find the right person, and getting them up to speed on your business.
The payoff is, once the right person is up to speed, they can become an asset and become Key Person in your business. But until you reach that point, it’s all investment on your behalf.
A Key Person is someone who contributes to the success of your business, and that your business is impacted financially if this person were not able to perform their duties.
For example, you may have a salesperson who contributes to 20% of your overall revenue; I would consider this person a Key Person.
Identifying a Key Person
Stop for a moment and think about the individuals on your business and how each of them contributes to your business. If a certain individual were to leave your business, and this does not impact your business financially, then this is not a Key Person.
However, if a person were to leave and your business and you would feel the pinch financially because of what they contributed, then I would consider them to be a Key Person.
Remember you are the first Key Person!
Protecting your Business
Now that you have identified who the Key Person or People are in your business, you need to protect your business from any loss of revenue when they cannot perform their duties due to sickness or accident or even death.
There are a few other methods to make up for any shortfalls in cash flow when these events occur, which are;
• You can use reserves
• Extend lending (if the bank will allow it)
• Bring in a capital partner (this will take time)
• Find a suitable replacement (this will take time also)
• Use an Insurer
Pass on the risk
A cost-effective way of providing funding for your business in the event of death or disability of a Key Person is to pass on the risk to an Insurer by using Key Person Insurance.
Key Person protection can be one of the cheapest ways to secure funds when your business experiences a loss of a Key Person. You pay a premium for them to take the risk and pay your business the income and capital should any of these events occur.
Some Insurance companies, have specialist solutions to protect Key People in business. Depending on the insurance company you can replace lost revenue, have a lump sum capital injection into your business to meet shortfalls in cash flow and to incentivise to recruit a new replacement.
You can never eliminate risk in business, but you can manage it, and how much it will affect your business and your personal life including your family members.