Recently we have seen financiers requesting ‘Key Person’ insurance as a protection measure when lending funds to their clients. This requirement mitigates the risks for all parties when lending to companies that are heavily reliant on key individuals for their success.
These lending institutions insist on ‘Key Person’ insurance for various reasons, including risk management, assurance of loan repayments, business stability and continuity, and safeguarding the interests of all stakeholders.
What is Key Person Insurance?
Key Person insurance protects a business by providing a lump sum payment for a nominated “Key” person within the business in the unfortunate event of their death, life-threatening disease, or permanent disability.
As the policy is owned by the company, all proceeds upon a successful claim are paid to the company.
What are the benefits to a business?
Key Person insurance serves several purposes including:
- Risk Mitigation – Provides financial protection to the company as the claim proceeds and can be used to cover lost revenue and pay outstanding company debts.
- Business continuity – Helps the business maintain continuity and stability in the face of sudden and adverse events.
- Recruitment and training – The payout can cover costs associated with the recruiting and training of a suitable replacement.
- Investor and Shareholder protection – It protects the interests of investors and shareholders by assuring the business remains financially secure.
The ultimate aim is to protect the business and remove the pressure and financial strain during a difficult and emotional time.
Who is classified as a Key Person?
A Key Person is someone whose knowledge, skills, experience, or relationships are crucial to the company’s current and ongoing success.
Some examples of a Key Person are a Director of the company, a key salesperson, an Operations Manager, or someone who holds specific technical knowledge (i.e. IT Manager).
What type of insurance is appropriate under Key Person cover?
- Life Insurance– This is the most common type of coverage for Key Person Insurance. In the event of a key person’s death, the insurance policy provides the business with a lump sum payment.
- Total and Permanent Disability (TPD) cover – In addition to life insurance, a business can choose Total and Permanent Disability cover. If a key person is deemed unable to work due to severe illness or injury with no possibility of returning to work, the policy provides the business with a lump sum payment.
- Trauma Cover –Trauma cover comes into play when a key person faces a specific critical illness or medical condition that could lead to an abrupt departure from the business. These conditions often include severe ailments like heart attacks, strokes, cancer, and other diseases outlined in the policy.
How much is the right cover?
The perfect cover amount is dependent on various factors including the size and nature of the business, and the potential financial loss incurred. The advisers at PNOlife are experts in this area and can assist in determining appropriate levels of cover and the correct policy structure.
Key Person insurance is a valuable risk management tool for businesses that rely heavily upon specific individuals for their success.
To learn more please reach out to our Life Insurance Adviser, Tristan Strange at tstrange@pno.com.au.
