Make sure your Key Man is insured

11 December 2013
2 minute read

Image of the 1Life logoIn business, the importance placed on a ‘key man’ is paramount, and subjectively refers to a person who plays a crucial role or has a rare talent without which a business would not be able to operate.  With this being said, business owners should take the necessary steps to ensure that should this ‘key’ person be disabled or – worse – die, the business’s prosperity will not be significantly impacted on, or at least be reduced.

Take for example, if you were a founder and owner of a company and as your company grew, you recognised the need to bring in a chief financial officer. Ultimately this person ensures that your business runs at optimal compliance and efficiency and takes care of all business and finance related matters. Over time, this has allowed you to focus on building client relationships and driving sales, leading to substantial growth in business. Imagine then, that your CFO is involved in an accident and becomes permanently disabled, or dies. Do you have a contingency plan in place to ensure your company is able to continue with  “business as usual”, or to at least cushion the potential financial impact that losing this key individual  and the impact on the business?

Generally, key man insurance can be described as an insurance policy taken out by a business to compensate for financial losses that would arise from the extended disability or death of an important member. In this instance, the policy may compensate for any losses to the company’s bottom line, that may be attributed to the absence of your CFO, allowing you to focus on retaining a decorum of “business as usual”, until a suitable care-taker or replacement may be appointed.

Looked at from this entrepreneurial angle, key man insurance is in fact critical for businesses of all sizes. If a business decides to get key man insurance, they would purchase a life insurance policy with a specified figure, referred to as ‘sum insured’. Where, upon the death or incapacitation of the person insured, the business will claim for compensation from the insurance company. This compensation may then be used to fulfil any financial need or obligation, for instance, putting together a package to hire another person or paying consultants until a suitable replacement is found, , pay off any debts or loans and if in the worst case scenario, the business cannot recover, the company can close its doors in a respectable manner.

Business owners who decide to take out this kind of policy should also remember to establish the value of the key person - to quantify the financial loss that would be incurred should this person die or become disabled. Following this, it is important to shape and tailor the cover required in order to meet the needs of the company.

It does not seem out of the ordinary for a business owner to insure physical assets, and similarly it should not seem any different to protect against the loss of its most valuable assets - the people who hold specialist knowledge, skill and expertise. This person, more often than not, may not be as easily replaced as a building or a vehicle, therefore making the decision around key man insurance critical to your business’s longevity.

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