Key Person Insurance – IMGA Mediprotect Newsletter – December
The Importance of Key Person Insurance
In most companies, particularly in ones that are small to medium size, success hinges upon a handful of individuals that possess highly specialized skills and experience. The loss of any one of these key employees to death, disability or a major trauma event can be detrimental to the future performance of the business.
The solution is to protect your business with key person insurance, which offers the financial means to stabilize a company during the adjustment period after the loss of a key employee or executive. Death or disability within the company is likely to mean loss of important management expertise as well as a significant decline in revenue and productivity. Not only that, but hefty costs can be incurred during the process of identifying and training one or more people that have the talents to step into the place of the key employee. If your business could be dramatically affected by the loss of one or more top people, key person insurance will protect against this risk.
Why Key Person Insurance for your business?
Businesses and their owners use life insurance and disability insurance to guard against the financial downfalls that often follow the death or disability of employees. In tandem with life and disability insurance, a company can purchase policies on the key employees to reserve the amount of funds needed to sufficiently replace their positions should they suddenly leave the workplace due to death or disability.
The business secures the key person insurance policy on the life of the key person. It owns the policy, paying the premiums and acting as the beneficiary in the event the key employee dies or becomes disabled. The company, not the key employee, is protected by key person insurance policies. Should a key employee die or become disabled, proceeds from the policy can be used by the company without restriction in regards to how funds are used. Most likely this would be to cover short term revenue deficits, as well as expenses associated with the search for adequate employee replacements.
Here’s how key person insurance works:
A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payout. The purpose of key person insurance is to help the company survive the blow of losing the person who makes the business work. The company can use the insurance proceeds to cover lost revenue, meet expenses until it can find a replacement person, or pay off debts and pay for recruitment and training costs of a new employee. In a tragic situation, key man insurance gives the company some options other than immediate bankruptcy.
Just knowing that operations can continue running smoothly without major financial disruption brings peace of mind to business owners and shareholders alike. Key person insurance could be the difference between the company’s downfall and its’ enduring success.
This information is general advice only and does not take into account any person’s objectives, financial situation and needs. Before acting on this information you should consider whether it is appropriate for you having regard to your own objectives, financial situation and needs and you should seek your own financial and taxation advice.
We suggest you speak with our life insurance specialist, Nigel Williams (# 07 3256 1433) for a review of your Key Person Insurance needs, or contact our office for an introduction.