Key Person Insurance –Protection for Business Viability
Key person insurance protects a business by providing a lump sum if a ‘trigger’ event such as death, disability or major illness (for example cancer) occurs.
This policy is owned by the business and the proceeds from this insurance policy are injected into the business
should the key person covered suffer one of the ‘trigger’ events (i.e. death, disability or major illness). The insurance provides a lump sum that can be used to:
Key people are the most valuable asset a business can have.
Their departure (especially if unexpected due to
health) could cause havoc not only to that person’s family, but also to the business and to the lives of all who remain involved in the business.
Key person contingency strategies are designed to provide the business with money to offset the financial loss resulting from the disability, major illness or death of a key person.
A key person is someone who:
A key person does not need to be a Director or Shareholder but could be a key employee.
When it comes to the success of your business, your key personnel play an invaluable role.
Key person insurance is designed to protect your business against the unexpected loss of a crucial team member due to events like death or disability.
To protect the business in the short term, key personnel should be insured to provide sufficient funding to cover
the loss in revenue. This will provide the company with some breathing space to restructure for the future,
without the financial strain resulting from a reduction in turnover.
In addition, or alternatively, the business may wish to reduce the levels of debt or protect goodwill by providing sufficient funds to cover such capital costs/losses.
The business usually owns and pays the premiums for business continuation insurance.
If the cover is obtained for revenue purposes, the premium is tax deductible. Claim proceeds are paid to the business and are generally assessable as income to the business. The expenses it is used to cover may be tax
Where cover is obtained for capital purposes, the premiums are not tax deductible. Death benefits paid to the business are not assessable but proceeds paid for critical illness or total and permanent disablement are
assessable to the business as a capital gain. The insured amount can be grossed up to cover this expected tax
Designed to manage the risk to your business if a business owner is forced to exit due to illness, injury or death, Buy/sell insurance pays a lump sum that ensures the remaining owners can acquire the departing owner’s equity and continue to run the business (if that’s what you’ve stated in your agreement).
The risks that can be covered by buy/sell insurance are death of a partner (via life insurance), major illness such as heart attack, stroke, cancer (trauma insurance) and total and permanent disability (TPD insurance).