Protecting vital cogs

Countless companies have them – those vital employees or managers who seem to do more than their share or help keep everything afloat.

Their value to a company means their sudden loss to illness or death can sometimes cripple a business, which can then be faced with the daunting task of trying to replace the deep industry knowledge of a company partner or the charisma of a top saleswoman.

Fortunately, it is an insurable risk, thanks to life insurance policies known as keyman or keyperson cover. By minimising the impact of losing treasured staff members, the cover can ensure the company maintains fiscal buoyancy, whether it is awaiting the return of the employee, hunting for a replacement 
or training a successor.

Valuing employees

The coverage should reflect the realistic loss to the company from the insurer’s perspective, requiring a valuation of the company. Once established, the proper measures to protect the company’s stakeholders will more easily identified. Factors to keep in mind are comparisons with similar businesses, the company’s economic outlook and its earning capacity.

The employer can then take out a policy on the life or health of any employee whose contribution is tied to the economic success of the company. A key person can be identified by specific factors, for instance, remuneration, decision-making power, responsibility and unique talent. In the event a claim is triggered, the policy provides the company with a lump sum benefit that is often tax-free. 

Damian Hartley, Make A Difference Insurance Senior Advisor, says the size of the claim will depend upon a detailed analysis. “There is a need to quantify what the potential loss is going to be, but it will also depend on any given point in time as to what the business is turning over and how they quantify what that person is bringing in.”

 How it works

Much of the wording for key person insurance is the same as an individually owned policy, 
but the ownership structure and purpose of 
the insurance differs.

Other notable variances include the ability to purchase the key person’s equity in the business and the resources to repay loans or offset income from subsequently lost business opportunities.

Traditional key person cover has paid out in lump sums but a product launched earlier this year offers a more flexible option, with the BT Key Person Income product offering cover for more short-term losses.

“Small businesses have been able to insure for negative financial impacts if a key person dies, or suffers from total permanent disability or a trauma event,” BT Life Insurance Products National Manager Scott Moffitt says. “These insurance products have focused on severe or permanent disability, yet businesses are more likely to be impacted by short-term disability.”

Tips for brokers

According to the DBM Business Financial Services Monitor, just 6% of small businesses have insurance in place to protect against the loss of a key person, making it an option with plenty of scope for brokers to help grow their wallet. 

“Let’s say you have business interruption insurance on the general side of things – key person insurance can be sold in a similar way,” Hartley says.

“In terms of small businesses that rely heavily on one person, there is a good marketing opportunity for brokers to sell,” he says. “Once you run through the various scenarios with clients, they can see the value in it.”