Whether you are a major corporation or an SME, you will have good people in critical positions that are key to your ongoing success. Just as it’s wise to insure business assets against loss, it’s good risk management to insure specialist or skilled people who create business profitability.
A key person is someone who provides the ideas, drive, initiative, and skills that generate the profits needed for the survival and growth of the business. They could include:
- a managing director or CEO who provides strong leadership
- a sales or marketing manager whose unique contacts or business methods give the business a competitive edge
- a highly skilled specialist who is largely responsible for attracting and keeping customers
- a finance manager who is a very astute ‘money manager’, the financial brains of the business, and the reason for the corporate entity’s good credit standing.
If one of those key people is affected by a serious illness or even an untimely death, your business may need to think about the following issues:
- Finding and integrating a suitable replacement
- Replacing profits
- Extra costs to hold market share
- Additional resources to meet contractual commitments
- Maintaining customer and supplier confidence
Insuring against key-person risk means that your business will receive a lump-sum payment to stabilise the business and help you make the necessary changes to recover from any loss.
A financial adviser or accountant can help owners or the board determine who the business’s key persons are. Once this has been established, the owners need to estimate the financial cost to the business if that key person were to suffer a tragic event. The business then takes out an appropriate insurance policy on each key person to offset the anticipated financial loss. It is the business that owns the policies and pays the premiums, and the business receives the proceeds if something happens to the key person.
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