A key person is an integral part of any business. A ‘key person’ is someone whose continued association with a business provides that business with a significant and direct economic gain. Economic gain means more than just profits. It can, amongst other things, also include cost savings, capital injections, good will, access to credit and access to customers. A common example of a key person is an employee who is directly responsible for bringing in sales or who holds the key technical expertise on which a business relies. They could also extend to the Managing director, Sales manager, Financial controller, Computer programmer, Specialist engineer, Site Manager, Floor Manager, Working director , Silent partner, Your spouse etc….
However, the owners of the business will usually be the key people.
How much key person insurance is needed?
Key person insurance can compensate the business for the loss of two different qualities:
▪ business profitability (revenue purpose) and
▪ the capital value of the business (capital purpose)
Key person insurance proceeds can replace the lost profit or capital value that the key person would have generated. The funds can be used to stabilise the business until a suitable replacement person is employed and who is capable of being trained to have the same key skills. Key person insurance proceeds can bridge the gap and enable the business to operate efficiently through, and after, the ordeal. Losing a key person can cause revenues to go down, and business costs to increase.
Key person insurance proceeds can be used to:
1. replace the revenue the key person would have generated
2. pay the extra costs the business incurs in finding a suitable replacement.
In either case, the profitability of the business can be maintained and the business stabilised.
The loss of a key person can also indirectly affect business revenue.
1. The extra pressure put on other staff may prevent them from performing to their usual standard. They may feel insecure about their future and the future of the business.
2. Other businesses with which the business deals with may also have the same uncertainties.
3. To some of your clients, the business is that key person – the client may never have dealt with anyone other than the key person.
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