This means that a sudden sickness or illness, a disability or even an unexpected death of a key person could cripple a business until they find and train a suitable replacement.
- Keyperson is a type of insurance that can protect businesses from the financial dips that can occur if there's an unexpected loss of an owner, manager, partner or skilled employee.
Insuring your businesses keyperson can provide funds to offset a reduction in the business cash flow that may occur due to an unplanned absence from a serious sickness or injury and provides funds to source a locum or find and train a replacement.
Most small businesses haven't considered their vulnerability to the keyperson and have no backup plan
What's the difference between life insurance and keyperson insurance?
The difference between life insurance and keyperson insurance is simply the ownership structure of the policy.
- Traditional life insurance protects the family of a person who takes out insurance policy
- Keyperson insurance is paid for by a company as a business expense to protect its ability to replace and cover the loss in revenue that the absent person would otherwise have provided.
Mindy is the joint owner of a cosmetic dental surgery. She’s responsible for the operations of the clinic and holds important relationships with many of the clinics patients and referral sources.
Recognising the impact her absence would have on the clinic, the company took out a Key Person Income Policy for Mindy with a monthly benefit of $47,000.
Mindy was later involved in a car accident over a holiday weekend and sustained a neck and shoulder injury that stopped her returning to work. Her sudden absence from the business caused an immediate disruption that resulted in a significant loss in clinic revenue.
Because of the nature of her injuries the insurance policy paid the monthly benefit of $47,000 to the clinic which allowed them to employ a locum while Mindy recovered. The keyperson insurance helped the clinic stabilise its income during this period.
So who are key people?
Anyone whose unexpected absence would leave a major void in the company day to day operations.
- Specialist skills: a business in the formative stage may heavily rely on the skills and abilities of one or a few individuals, such as a restaurant head chef, medical practitioner, practice manager or a sole accountant.
- Operations: a business considering major changes or merges may be more vulnerable to the loss of specialist skills particularly those for which the business depends for the change or merger.
- Resources: a smaller business many depend upon a small group of people sharing their individual skills and pooling their network of expertise to form a partnership.
- Brand: The business founders or head who is closely linked to the brands image of the business and success in the minds of the general public, suppliers, distributors, customers and other stakeholders.
Anyone who is a business owner (or an arms-length employee) with specific skills or knowledge who is working in the business to generate revenue and whose absences from the business would result in significant loss of revenues as the business continued to operate.
Shannon was a CEO and founder of a specialist company that attracted a particular type of tech investor. His larger than life personality and technical insights meant his profile within that industry was strong and responsible for his company's growth success.
While he was the primary shareholder in the business, he had 3 investors who each invested $300,000 to fund the growth strategy. The shareholder agreement specified the business would be required to hold Keyperson style insurance to cover the shareholders investment upon the death or disability of the founder CEO.
In addition to the investment of $900,000 the costs to replace the founder (in the event of his becoming absent for the business) was $295,000 made up of international recruitment fees, salary costs and the cost of a years fixed overhead runnings costs for the business.
As part of a protection strategy, the following policies were put in place.
- Keyperson Life insurance $900,000 + $295,000
- Disability insurance $900,000 + $295,000
A year later after coming back from a month's Skiing trip to Japan, Shannon tripped while walking down the fire exit stairs at the company office and broke both his wrists in the process.
Thankfully he didn't lose his life or his company, just some dignity.