Why?
Businesses insure the company's
liability, machinery, cars, buildings and equipment.
It is financially prudent for a business to surround key people
with the same degree of protection. Key
people are essential to the success and profitability of a business. Only a human being has the initiative, skill and ingenuity to
turn capital into profit. Insurance
that protects a business from the loss of such a person through death or
disability is called "key person insurance".
The following narrative describes how,
using the latest risk insurance products, a comprehensive protection
scheme can be structured at both the corporate and individual levels to
provide cash flow, income and lump sum protection.
The
Risks
Profitability - the loss of a key person involves higher costs
and reduces business revenue. Insurance proceeds are used either to
replace the revenue that person would have generated, or to pay the extra
costs associated with finding a suitable replacement, with the result that
the business is stabilized.
Loss of profit can occur in the
following areas:-
- Sales Revenue - if the key person was involved in marketing
- Recruiting Costs - attracting and recruiting a suitable replacement
- Training Costs - so that a replacement can operate proficiently
- Destabilizations - the loss of a key person can have an indirect effect on revenue due to the reorganization that has to occur in the short term.
Other key people
may have to take on extra duties and so cannot perform to their usual
standard. This is
particularly the case if the key person is also an owner of the business.
Business owners usually put much more effort into their business
performance than is reflected by their salaries, which are usually not
commensurate with their workload.
Capital
Value - replacing lost capital value is a key
component of this type of business protection.
Whilst profitability is usually restored with a replacement revenue
stream, lost capital value is replaced with lump sums.
Capital value can be affected in the following areas :
-
Goodwill - a person can bring a goodwill factor into a business by virtue of their
specialist knowledge, skill, business contacts or professional reputation. The loss of
such a person can thus reduce a business's goodwill.
-
Credit Standing - some companies can secure credit lines more easily than others because a director has sufficient personal assets to guarantee the business loan. If that person dies, those assets will pass into other hands, and the business will have to find new sources of security.
-
Loan Accounts - the loss of a key person who has lent money to the business may mean that the loan will have to be repaid immediately.
Shareholder
Acrimony - the death of a key person who is also
a shareholder or partner in the business can mean that their shares are
passed to an individual who is not content to be a passive shareholder in
the business and whose influence over the business is then seen as
undesirable; the resulting acrimony is highly disruptive, thus affecting
both profitability and capital value.
A lump sum is required to buy out this interest.
Solutions
All of the above
situations can be adequately avoided.
Firstly, one
should not forget that although the business has a risk it wishes to
protect itself against, the individual and his or her family also have a
risk and that risk should be covered by a policy owned by that individual
for his family's benefit.
-
Profitability (Revenue Generation) - Protect business profitability with a policy on each individual key person's income. Should any key person within the business become incapable of performing the important duties of his occupation, the insurance policy will replace up to 75% of the lost income via an income replacement policy with the benefit level determined by the lost individual's salary
-
Capital Value (Partnership Interests) - The above type of cover relates to monthly sums and are intended to replace income streams. Lost capital value can be replaced by lump sum insurance that will pay when a key person is diagnosed with an illness which will prevent him from performing his important duties. This is achieved through a term or whole life policy with a critical conditions benefit attached. The critical conditions benefit pays out on the diagnosis of a number of defined "critical conditions" (the extent of which varies from policy to policy).
-
Such lump sums can be used to replace lost capital It can also be used to provide the funds necessary to purchase shares from a deceased former staff member's estate.
The
Benefits
Thus protected, a business will be
financially equipped to emerge from what would otherwise be an extremely
disruptive incident financially unscathed.
Income replacement and business capital insurance will have
replaced lost cash flow and given the business the breathing space it
needed.
Term and critical conditions insurance
will have provided the lump sums to replace any decline in value which the
business might suffer, calming creditors who might otherwise have
foreclosed, and restoring business stability.
Request a personalised
Protection Plan illustration by clicking on the e-mail button below.
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