Why a Key Person Insurance is Important for Businesses

What would happen if a key person in your business was unable to work?

For small to medium business owners, if the Keyperson in your business suddenly became unable to work it could put the business at risk of collapsing. In this instance, you cannot afford to disregard the need for Keyperson Insurance.

What is a Keyperson Insurance?

Keyperson Insurance is simply life insurance on the key persons in a business. In a small or medium business, this is usually the owner, the founders or perhaps a key employee or two with unique or specialist skill and knowledge. These are the individuals who are fundamental to a business – the ones whose absence would ‘sink’ the company.

Protecting those people is facilitated by Keyperson insurance, it protects the business and key people in the event of death, total and permanent disability or even a trauma event.

Why is a Keyperson Insurance Needed?

Two objectives for key person insurance is to provide supplementary Revenue or Capital. Depending on the above, the premiums paid and the benefits received are treated differently for tax purposes.

Determining the benefit amount is dependent on the needs of the business. Common uses for Keyperson Insurance can include

  • Paying out debt to third-party lenders (i.e. “the bank”)
  • Providing funds to pay out the estate of a deceased shareholder for their interest in the business, without having to seek finance (often organised in conjunction with a Shareholders Agreement)
  • Cover the cost of hiring a temporary replacement where there is still a legal requirement to pay the existing keyperson.

We would advise seeking professional advice to establish levels of cover.

Whilst often required by lenders, Keyperson Insurance can provide some peace of mind to business owners that their business can continue if others they are in business with are affected by negative health events, or conversely that their own loved ones will be looked after if they are the unfortunate person.

Advivo Accountants and Advisors can assist and connect you with the right professionals to ensure that you have the right cover in place to meet the requirements of your circumstances. Talk to us today on 07 3226 1800 or use our Contact Form for your enquiries.