Key Person Insurance

What is Key Person insurance?

Key person insurance is basically personal insurance that is usually owned by a business on the life of a key person.  Every business has a key person or key people who are responsible for or contribute towards the profitability of the business.

Why do you need Key Person insurance?

The purpose of key person insurance is to ensure that your business does not suffer a financial loss due to a key person becoming seriously injured, ill or passing away prematurely.  The benefits received by a business from a key person policy are used to offset any financial loss caused by the departure of the key person.

Key person insurance is necessary for any business with employees, business owners or external partners who contribute towards the profitability of the business.  The loss of a key person is usually categorised as being either capital purpose or revenue purpose.

Capital purpose cover usually relates to a key person securing a debt or providing a loan to the business that would need to be repaid on the departure of that key person.  Revenue purpose cover relates more to any loss of sales or profits that would be caused by the departure of the key person.

What is Buy / Sell Insurance?

Buy/sell insurance is similar to key person insurance however the purpose of the cover is to financially protect the business owner’s in the event of death or permanent disability rather than the business itself.  The benefits received provide money to the remaining business owner’s so they can buy out the share of the departing owner’s interest in the business.  The departing owner’s family receive a fair price for the departing owners share in the business with minimal delay.

Without buy/sell cover, the remaining owners may struggle to find sufficient funds to buy out the departing owner.  In addition, the departing owners family may not receive a fair value for their share in the business and/or experience a considerable delay in receiving the funds.