Keyperson Insurance
Almost every business has one or more individuals whose knowledge, experience or business connections make them necessary for the continued success of their organisation.
These individuals are identified as “key people” and the prudent business will have a plan for their sudden departure in the event of death or disability. Without this plan, not only will the business face the normal emotional strain but also a potential financial crisis. It is worth noting some of the things that can occur if a key person dies or becomes disabled;
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Banks & creditors: |
Creditors get nervous with the loss of a key person. |
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Business revenue: |
The loss of a key person can have a dramatic effect on future business sales and revenue. |
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Customers: |
Is there a risk that customers will be lost ? Will services be maintained as agreed ? Customers may look for alternatives. |
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Competitors: |
A loss of a key person provides an opportunity to attack a client base. This can extend to poaching staff and takeover rumours. |
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Staff: |
Staff can become concerned at the loss of a key person and may consider alternatives. Loss of experience can be costly to a firm. |
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Key persons family: |
The family of the key person will be distressed and may expect support from the company. |
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New staff: |
There will be costs to recruit and train a replacement. It will cost more to entice a qualified person to fill the role. |
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Business goodwill: |
Goodwill is often linked to a key person. The value of the business will be substantially reduced if that key person is lost. |
Purpose of Key Person Insurance
Key person insurance falls into two areas which are outlined in the table below:
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Revenue Purpose |
Capital Purpose |
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Generally for capital purposes proceeds are not assessable and premiums paid are not deductible. However, key person proceeds for revenue purposes, are assessable and premiums paid are deductible. Capital gains tax may also be a consideration, depending on the different types of cover being provided.