Setting up Key Person cover for your business
Family businesses are the backbone of the Australian economy, representing about 70% of the 2,238,299 actively trading businesses in Australia (ABS 2016-17). In this article, we address the mechanics of setting up Key Person cover for your business from policy ownership to valuing a Key Person. To find out more about Key Person cover and how to determine who the Key Person/s is/are within in your business, click here.
Key person insurance is intended to protect the business, therefore in most situations, the business is the policy owner. As the business is likely to receive the insurance benefits in the event of claim, insurance premiums are paid by the business.
Each business is unique and in other situations, the life insured may be the policy owner or a specialised business insurance trust.
In deciding the policy owner it is important to consider the tax implications of the insurance premiums and insurance proceeds.
VALUING A KEY PERSON
When valuing a Key Person, the business needs to make sure the lump sum insurance benefit would offset the negative financial impact of the key individual’s unforeseen death, terminal illness, permanent disablement or suffering of a critical illness.
The business may consider the following:
- Is the key person responsible for a particular client/contract and would that client/contract be lost? Can that client/contact be monetized?
- What is the value of the loan or other finance facility that would need to be repaid or replaced?
- With the absence of the key person, how would this impact revenue and profits?
- What working capital would be required to keep the business operating until a replacement can be located?
- Consideration must be given to other costs associated with advertising, locating, and training an appropriate replacement for the key person
Speak to your business insurance adviser or contact Alex Roe to further understand the mechanics of Key Person cover.
This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.