Key-Person Insurance

Most business owners are 'key' to the operation of a business. Key Person insurance and planning simply deals with whether the business will be disadvantaged if the 'key person' dies, is injured or falls sick and is no longer able to generate revenue for the business.

Key people don't necessarily need to be owners. Many businesses insure key staff members who have skills that are difficult to replace or where their ‘loss’ would have a significant impact on the positive performance or even existence of the business.

Key Person insurance exists to be able to provide revenue for the business or to repay debt held by the business. The taxation laws around Key Person insurance are quite strict and any business should complete a set of corporate governance tasks when Key Person Insurance is put in place. Complete Cover assists businesses with this and making sure they keep on top of changes to the law.

Essential for business continuance
Almost every business has one or more individuals whose capital investment, knowledge, experience or business connections make their input necessary for the continued success of the business.

The individuals can be identified as ‘key people’ and the prudent business will have developed a plan to deal with the sudden departure of a key person in the event of their unexpected resignation or death or permanent incapacity.

The plan must include strategies to retain key people and identify potential impacts on the business if they were suddenly no longer available. Inevitably, there are more questions than answers but just thinking about the questions and discussing alternative solutions will place the business in a far stronger position.

Why have a key person plan?
A key person can be one or more individuals within the organisation. A key person has contact with a wide range of different people on a daily basis. Their skills, experience, relationships and, in some cases, capital help them to keep all stakeholders satisfied and the business running smoothly. The sudden departure of a key person would have a detrimental effect on the financial health of the business.

Take away the key person and an appreciation of their value and skill is suddenly realised.

Let’s consider some of the things that could happen if a key person resigns unexpectedly, dies or becomes disabled.

The bank	The loss of a business key person can make the bank manager very nervous. In particular, if the key person was a guarantor for the finance, the bank may be able to call in outstanding debt.
Business revenue	Some key people are directly responsible for sales. Their loss will have a dramatic effect on business inflows, revenue and, potentially, business profit.
Creditors	Creditors, like banks, can become very nervous wondering if they will be paid. Previously generous payment terms may suddenly become more stringent.
Competitors	What better time to attack the market than after a competitor has lost a key person? Some competitors may even have more predatory thoughts, including takeovers, poaching disgruntled staff and approaching clients with unsettling rumours.
Staff	Fellow employees of the business are more likely than most to realise just how valuable the key person was. They could very easily become concerned about the business and their job security.
Key person’s family	In the case of death or disability, the family of the key person will obviously be distressed and may expect support from the business.
New staff	Almost certainly a replacement needs to be recruited - and quickly. In many cases this is not an inexpensive exercise, even if the expertise is readily available in the Australian market.
Business goodwill	The amount of goodwill that a business has is often linked to the key people. Is the goodwill totally lost when the key person is no longer there?

SIX SIMPLE STEPS TO KEY PERSON PLANNING
At first glance, identifying a key person can be daunting. Where do you start? Who do you involve? Is it a priority? By following six simple steps, however, and working with the right people, it can be a very productive exercise that gives a business every chance of continued success.

Step 1 Who should you get to help you?
Like any planning exercise, you should not try to do it alone.

Your accountant, and anybody else who knows the company intimately, should be involved. Perhaps: the key people themselves; and key stakeholders in your business, such as suppliers and staff. Complete Cover is able to assist you in this process.

Step 2 Identify your key person

Each business may have to vary this process to suit their situation. However, making a list of all the potential key people is essential. Then look at each person individually, running through the check list to see if that person, for any reason, would impact on the checklist item.

An example of how the checklist would identify the key person:

Would the loss of this person impact upon:	Person A: Sales Manager	Person B: Managing Director	Person C: Operations Manager
Sales revenue or income?	Yes	No	No
Overall profitability?	Yes	Yes	Yes
Access to capital and finance?	No	Yes	No
Existing loans/debts?	No	Yes	No
Overall business stability?	Yes	Yes	Yes
Staff performance?	No	No	Yes
Creditor confidence?	No	Yes	Yes
Client support and satisfaction?	Yes	Yes	Yes
Supplier confidence?	No	Yes	No

Step 3: Quantify the impact of losing a key person
This is an extremely important step and one to which you should devote some time and resources. It is important to try and place a dollar figure on the overall impact. We suggest that the most effective method is to consult with your Accountant.

Once again, a check list of questions should be applied to each key person:

• How much revenue will be lost until they are replaced?
• Will any debts need to be paid or re-financed?
• Will there be any business expenses to cover until they are replaced?
• Will clients leave and what is their value to the business?
• What will it cost to replace the key person? (Include recruitment costs, training costs and ‘golden hellos’ or incentives.)

Step 4: Develop your plan

Now that you have a good idea who your key people are and what they might be worth to your business, it’s time to put in place a plan to limit the effects on the business of their departure.

Your plan should cover three important areas:

• What can you do to retain key people in your business?
• What will you do if they leave voluntarily (e.g. resign and move to a competitor)?
• What can you do to minimise the impact of their sudden departure through death or disability?

The answer to each of these questions is likely to be different for every business and each key person.

Step 5: Funding and the role of insurance
Ironically, of the three important areas above, often the easiest and lowest cost scenario to plan for is the loss of a key person through death or disability.
A business can take out insurance on key people that will ensure, in the event of their death or disability, that a lump sum is available to the business to help alleviate some of the issues that arise.
Insurance funds can be used to:

• pay out any debts to banks or creditors;
• replace lost revenue until a replacement can be found;
• cover recruitment costs;
• alleviate staff, creditors, customers and supplier concerns about the financial viability of the business; and
• replace any goodwill value held on the balance sheet.

Step 6: Communicate your plan
As with any planning, an important part of ensuring success is communicating the plan to the relevant stakeholders.

Your ‘key people’ should know what plans are in place to retain them, but equally, they should be aware of what plans you have in place for their unexpected departure. One of the most powerful forms of incentive is letting the individual know that you appreciate their value - your key person plan is one way of showing this.

Other staff, creditors, the bank and suppliers will also have recognised the value of your key individuals and have taken steps to minimise the risk of their departure.