Let’s talk business risk: Have you got a plan in place if you lose a key person?
Ever thought about what might happen if a key person in your business suddenly couldn’t work anymore?
What would happen if your business partner or a key team member passed away suddenly or had an accident that rendered them unable to work?
Undoubtedly, this could pose a significant risk to your business.
So, what are you doing about it?
As we head into the new financial year, many organisations are finalising operational budgets.
And so now is also the perfect time to explore all of your insurance options and make sure you’re covered for anything that could potentially adversely affect your business.
“It’s a funny thing… many Australians are pretty lax when it comes to insurance,” says Jim Vass of ATB Partners, a tax, accounting and financial advisory firm in Parramatta, Sydney.
“Maybe that’s born out of our happy-go-lucky, laid back, ‘she’ll be right mate’ nature. Maybe it’s born out of a general misconception that insurance is expensive and complicated. But whatever it is that underpins our carefree attitude, it is definitely a problem. Most people are vastly underinsured and many small businesses don’t really take the time to consider what they’ll really need, if tragedy or disaster strikes.”
“‘Key person’ insurance is one cover in particular that isn’t well known. But when you’re a small business owner it is a vital consideration,” he says.
Key person insurance
Key person insurance (also called ‘key man’ insurance) is a policy that a business owner/employer can take out on the life or health of any employee whose knowledge, work or overall contribution is considered uniquely valuable to the company. Cover will then provide financial protection against lost revenue and the capital value of your business, should a key person suffer a major illness, injury or death.
The insurance payout will assist with costs associated with hiring temporary help or recruiting a successor, as well as any losses sustained by the business, such as an inability to progress the launch of a specialised product, or transact ‘normal’ business until successors are trained or the business resolves how to move forward.
Smaller companies with partnership structures may also use it to protect each partner. If, for example, one partner passes away, the other partner/s will usually want to purchase that person’s shares in the business. If key person insurance and the correct buy/sell agreements are in place, then this is able to happen with ease.
Key person insurance is usually determined by the size of the business and the value to the business of the person that is to be insured.
“Most businesses are now at year-end and finalising budgets for the year ahead, so it’s the perfect time to take a moment to consider your key team members and the contributions that they make,” explains Jim.
“You may want to insure a principal shareholder, a senior R&D specialist, the person with the key technical expertise behind your products, or a particularly effective salesperson. Key person insurance is definitely worth considering as part of your overall risk management strategy. “
“You can either pay it from the capital account or the revenue account, and if you pay it from the revenue account, it will be tax deductible,” he says.
“If you want to know more about insurance products you may not have considered, contact us. There is such a thing as being over-insured, so any change in any policies should be done with a full audit of what you have – that is, a thorough understanding of exactly what you’re covered for – so check the fine print. Duplications do happen across policies, and they are a waste of money, but specialised insurance that’s been well-considered with your particular business needs in mind is always a good investment.”
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