Are you a small business owner? Do you have key person insurance? Are you even aware what key person insurance is?

I’ll tell you a story – one that should serve as a warning to anyone who doesn’t have the right kind of insurance. There was a small business in my local area which had been operating for around 25 years successfully. They had managed to survive lots of economic recessions, and changes in business around them – but when one of the partners was suddenly killed in a car accident, the bank required the payment of an outstanding bank debt. The company was forced to dissolve, even though they didn’t want to.

Unexpected deaths or disability can affect businesses every day – and it’s usually in the case of a death or injury to a key employee, manager or owner. The best possible outcome for situations like this is that the business has prepared for the event and the consequences aren’t catastrophic – just difficult.

More often what happens is that the loss of a key member or person in a business means a devastating change. Layoffs, bankruptcy and complete failure of a company are common outcomes. Such outcomes can be avoided with the purchase of insurance for ‘key’ persons.

Key person insurance

What Is Key Person Insurance?

This is the insurance that you get as life or disability insurance which is purchased for the purposes of indemnifying a company against losses that may arise from the death or disability of a key person in the business. In short, it is protective insurance for any person who is essential to the business’ success and ongoing operation.

How does it benefit my small business?

Having key person insurance protects your small business in a number of ways. Here are five key ways that it can help you.

Number One: Maintain revenue

When the person who is missing is a big contributor to sales and / or cash flow, the key person insurance will help to make sure sufficient funds are available until revenue can be replaced. Even though creditors and suppliers will be sympathetic to your hardship, they too have businesses to run and so cannot afford to miss out on payment.

Number Two: Funding the recruitment and training of a replacement

Sourcing, hiring and training a key person is a big job. When the loss of a key person means that you have to replace them, you need money and access to resources to get them up to speed as soon as possible. When the unexpected loss of a key person means lost revenue or production delays, finding someone quickly who can get up to speed is critical to the success of your business.

Asset protection

Number Three: Protect your assets

Companies often have mortgages on real estate and obligations to pay. The person who is missing is often a key person responsible for sales and revenue. This will be a concern to any creditor or lender, and key person insurance means that you have the foresight for this kind of situation.

Number Four: Cash Flow

If there is an interruption to the flow of funds due to the loss of a key person, it can result in a loss of market shares, a decline in sales and an unexpected loss. The proceeds from the insurance can help to fill the gap.

Number Five: Protect existing equity owners

Oftentimes, the key person is also an owner of the business and their family will inherit his or her business assets. Insurance owned by the company can help to pay business obligations to the family.

Owning a business is a risky endeavour and one that is best to be well prepared for. Take the time to find out more about key person insurance today and stay protected. VFPS offer a range of key person insurance if you want to find out more, I’ve always found them to be helpful.