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Who makes the profits in your business?
Are you insuring your PCs or your VPs?
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Business owners and other key executives spend a considerable amount of time and effort in order to acquire the knowledge, experience, relationships and skills that make them valuable to a business. Therefore, their absence can have a severe financial impact on a business.
The co-owners and shareholders are not the only important contributors to a business’s success. Key persons, such as the director of a company, a key sales person, a key project manager or a key person with specific skills or relationships, play a vital role in the success of a business. Therefore, Key Person Insurance is another very important type of business insurance that must be considered by businesses when drafting their succession plans.
Key Person Insurance is an insurance policy that has been taken out by the business on a key member of their staff in order to compensate for the financial losses that would arise from the death or disability of this individual.
A key person is defined as anyone whose knowledge, skills, or overall work contribution is considered to be uniquely valuable and irreplaceable for the business. The employer purchases key person insurance in order to offset the costs associated with hiring and training a replacement, which will take time and will negatively impact the productivity of the business.
If a key person is disabled, the business may face the same problems if that same person had died:
- A reduction in profits
- A loss of credit
- The cost of recruiting and training a replacement
However, in the case of a disability the employer then has the added cost of the disabled person’s continuing need for personal income. An income replacement plan will cover the key person’s personal financial needs, thus freeing up those funds for the employer to start looking for and training a replacement.
The effects on business profits in the absence of a key person may weaken the financial stability of the business and may even affect the very survival of the business. Key Person Insurance can considerably reduce the negative impact such a circumstance can have on a business and provides assurances to the business’s creditors and employees that the business will continue even if a key person dies or suffers a permanent disability.
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