If you think about your business and the people who run it, you know that your business can’t do without certain integral people. Whether it is key employee, a company director or you as the business owner – you know that your business would be at risk without your “Key” man or woman.
Key Man Insurance is a way of ensuring the safety of your business within a world of volatility. In thisBusiness Risk Cover Part 2 article, you will find out why you can’t risk losing your key person.
The last article focused on the cover required between partners, but this cover is specifically for the business. Key Person cover is owned by a company and covers the life of an integral member of staff.
A business is an entity in its own right, and needs to ensure that the people most integral to the success and survival of the company are taken care of. This is to make sure that in case that they are unable to fulfill their roles because of a permanent incapacity or death, financial risks can then be managed and the business can continue with as little impact as possible.
Imagine that a business has a Sales Manager that generates 50% of the revenue income for your business. If that person was suddenly taken out of the equation as a result of a permanent incapacity or death, the company could potentially close as it would lose 50% of its revenue. All the staff would lose their jobs. Creditors would lose their money. The owners would lose their business. Losing key people that are fundamental to a business, can ultimately result in the end of the business.
A business has what is referred to as ‘insurable interest’ on its key staff because of the potential risks. There is a lot of debate on how much cover is required for key person cover, but the amount of cover depends greatly on the person’s role and the industry that the company is involved in.
Let’s unpack the costs that need to be covered as this will help to quantify the cover needed.
- Firstly, you’d need to find someone that is of a similar skill set and experience level as the key individual to take over the role. In some cases, this could require more than one person to fill the gap. I recently put a key person policy in place for a Managing Director of a company. In order to fill in any potential holes in the company that would result from this person no longer being able to fulfill his role, it would require multiple staff to be sourced (accountant, general manager, sales).
- You would need to be able to cover enough of the monthly remuneration until the person is ‘up to speed’ as well as any additional costs associated with finding the ideal candidate (recruiter’s costs, etc.).
- You would need to ensure that if there are any losses, such as losses in sales. It is recommended that one covers the total revenue lost, but also rather focus on covering the lost profit. As that’s what’s lost, especially if the business is involved in selling tangibles. Each case must be calculated on its unique merits, therefore having an experienced broker is vital.
Additional costs such as training and skills development that must also be factored in, so doing a proper job in calculating your actual needs is a must.
There is no doubt that losing a key individual is never ideal. There will be negative consequences such as emotional pain, drop in morale and probably even legal ramifications such as contingent liabilities (the topic of my next article), but good financial planning would be the difference between keeping your doors open or potentially closing for good.