Why Key Person Insurance is necessary…
If your business is like ours, the most valuable asset of your business is your people and your clients. Each day, we couldn’t look after our clients without our team, especially our key team members. It’s likely, our business will be no different to most other small businesses out there; our team have unique abilities to ensure that our clients are looked after and are there to help them achieve their goals.
As a business owner, have you ever thought about what would happen if one of your key people was suddenly taken ill, injured to the extent that they couldn’t work or unexpectedly passed away? Stop and ask yourself would your business suffer, and revenue decline due to a key person being lost.
No one likes to think about the worst happening, but unfortunately, it can and often with huge emotional and financial toll on everyone. Key Person Insurance (often referred to as Keyman Insurance) helps your business to continue ticking over financially should this occur.
Key Person insurance is effectively insurance that covers a key person should they suffer a major injury, illness, or even death.
The insurance is owned by the business and is generally established for revenue purposes, although can be set up for capital purposes in some cases. Where it is established for revenue purposes the premium is generally tax-deductible, with the proceeds on payout being treated as assessable income to the business.
These funds are then used at the discretion of your business to pay for things like costs of recruiting and training of a replacement, and remuneration of the replacement for the key person who is no longer working in the business.
Whilst there is no set formula for working through how much cover a business should take out, a rule of thumb is between 18 months and 2 years of salary. Generally, the more specialised and senior the key person being insured, the closer to 2 years’ salary in cover is required.
Let me tell you about Gaye*…
She runs a professional services business when one of her key employees Trish* was diagnosed with cancer. Fortunately for Trish this cancer was picked up early and was treatable, even so, she was off work for over six months and when she came back it was part-time for a further six months. Gaye relied on Trish for the day-to-day management of her business and due to capacity issues needed to replace her whilst she was off getting treatment to save her life.
Gaye was fortunate she had put in place appropriate insurance cover and the business received the much-needed funds to pay for a locum to do Trish’s work. Whilst the business had a surplus cash flow, it would have significantly impacted revenue should the insurance proceeds not come in, paying for Trish’s leave entitlements alongside her replacement who being a locum cost more in the short term.
We also know that insurance companies do pay claims, the Financial Services Council released figures showing that over 100,000 claims were paid during 2019 across all insurance companies amounting to over $12 Billion, with more than 90% of those claims being paid according to APRA and ASIC.
For Gaye, it was a relief to know that she had the appropriate cover in place but there are many small business owners that we speak to that haven’t considered this type of insurance cover. Consider the key people in your business and how your business would be impacted if they were to die, become sick or disabled. If you know that your business would suffer a financial loss, reach out to the JBS Financial team to learn more here and discuss what’s right for you. We understand what it’s like to run a business and ensure that our key people including our partners have the appropriate level of insurance in place.
Jenny Brown – CEO and Financial Adviser
*Names have been changed to protect their real identity.
Insurance Claims Statistics Australia 2020 – Does your insurer pay claims? (insurancewatch.com.au)