Wed | Aug 16, 2017

Deborah Vieira | The key to business protection

Published:Friday | May 12, 2017 | 5:00 AM
Deborah Vieira
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Would you sell your successful business that you have worked 20 or more years to build for nothing? Of course not.

But that is effectively what you would be doing if key persons in your business did not have key man insurance in the event of death or disability.

Key person risk occurs when one person wears many hats and is enormously important to your business' viability. These persons are the face of the business and are of exceptional importance to a company. They possess the training, skills and track record to prove their talents.

A few examples of key persons, especially in small or medium enterprises (SMEs), are the president or chief executive officer who is the driving force behind the company, sales managers who oversee sales people and some marketing duties, and the accountant/ financial controller whose key function is to manage the finances.

Imagine losing one or more of these persons in your company either by death or disability.

You may say that no one is indispensable. However, this loss may cause serious financial distress as this person's knowledge, relationships and experience are unique to your business.

It is your responsibility to appropriately address this risk. Even with risk mitigation planning, there are still some employees who remain vital to a business. They are your founding partners or key relationship holders.

Give thought to the untimeliness which is often associated with tragic events. Without sufficient cash flow or business protocols, it might even force a fire sale of business assets or cause loss of other staff.

Problems that usually arise on the death of a key person include loss or reduced lines of credit; reduction of customer confidence; dilution of supplier confidence, which may result in tighter credit terms; staff morale may be affected; or a halt or delay in business expansion.

Insuring an individual may sound like an unusual solution, but it is a wise strategy for protecting companies from financial loss. Key man insurance - in the form of a life and/or disability policy on the life of the key person - provides a lump sum benefit in the event that a key employee or business owner ceases to work due to premature death or disability.

The policy should have a sum insured that aligns to the key person's value to the business. A good rule of thumb is five to 10 years' remuneration. If the person dies or becomes disabled, the insurance proceeds provide a pool of capital that can be used to extinguish debts, offset revenue shortfall, offset loss of goodwill, and/or recruit replacement key persons.

A bonus to the key person is that, should they live to retirement, the build-up of cash reserves in the policy could be considered as a retirement loyalty bonus, which may go a far way in providing financial security in one's retirement years. This would create an additional incentive to key persons and hence drive greater company loyalty.

Key person life or disability insurance can be written on a variety of different types of policies, depending on individual companies specific needs.

Experience has shown that a well-structured key person risk-management plan, with periodic reviews, will enable financial security and the well-being of your business.

- Deborah Vieira is a financial adviser at Lawe Insurance Brokers.deborahv@laweinsurance.com