Key person life insurance – a tool for business continuity

Businesspeople accept without question the wisdom of protecting the company against loss of its property values. They take care to insure physical assets against losses from fire, windstorm, flood, etc. They take every precaution in insuring capital assets against embezzlement and theft. Yet protection against the loss of the management assets of the business may be a far more vital need.

According to the US Department of Commerce, “Almost every business has one or more people upon whom it depends heavily for its major success. Frequently it is the proprietor or manager. It might be the financial person, upon whose shoulders rest the firm’s credit…it might be sales manager...engineer or scientist whose efforts produce the firm’s life blood of ideas.”

In any business – family owned or otherwise – the death of a key person could result in a money loss as impactful as any other disaster. One (often overlooked) aspect of insurance for companies is a form of life insurance called key person insurance.

Life insurance is a way of preserving and protecting your estate by providing peace of mind for you and your loved ones. It provides two major benefits:

1. To protect your future potential income if you pass away.

2. To protect all the people that you’ve left behind when you pass away as it relates to any liabilities they may need to take care off.

Key person protection through a life insurance, critical illness, income protection plan, or a combination of all three, can provide a cash injection to the business if a key person dies or suffers a serious illness, therefore allowing the business to continue trading at a time of considerable uncertainty and financial pressure.

The fact is that many companies don’t think of what could go wrong, which is why their plans are usually based on what could go right.

Key person insurance policies are designed in a way that allows businesses to change that perspective and think about those events that could negatively impact their people, revenue, cash flow, profits and legacy. Asking yourself a few simple questions could have a profound impact on your company’s operations.

1. What effect would it have on the business, its owners and the key people, if one or more of them became disabled, critically ill or died?

2. How would the loss of these key people impact the business’ revenue and cash flow?

3. How will the key people and their families be taken care of if they can no longer contribute to the business due to disability, illness or death?

Regardless of how small or large the company, key person insurance could provide a win-win solution to both the employee and the business, should something go wrong.

For key person insurance, the business determines the key person’s profit-making value that would be lost at death and applies for insurance in this amount on the key person’s life. The company pays the premiums and owns the policy and retains all rights to it. It is the beneficiary of the policy and can borrow against it or surrender it for cash.

To summarise, if the key person dies prematurely, the plan guarantees that cash will be available immediately to absorb the shock to the business. Business credit will be maintained, money will be there to hire and train a new person and to offset smaller profits until the replacement is capable.

It will ensure that there is no disruption of service and that confidence on the part of customers, suppliers and employees remains intact. And for the insured person, the addition to surplus, coming from the life insurance payment, is a tax-free increase.

The TT Chamber thanks Dianne Mohammed, executive agent, Guardian Life of the Caribbean Limited for contributing this article.