Why Key Person Insurance is important
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The most important asset in any business is its people. The ongoing profitability and sustainability and, as a result, the capital value of the business, are largely reliant on the input of the key employees in the business. Therefore the loss of a key person constitutes a risk for the business.
What is a key person? A key person is someone whose absence through death or disability will have a material effect on the future of the business.
Most businesses have key personnel. If the key person is lost to the business as a result of death or disability, then the business could suffer a direct loss because of decreased sales and/or the high cost of replacing a skilled employee, as well as the opportunity cost in the loss of profits/sales while a new replacement is being trained.
Key person insurance is a simple, cost-effective solution that provides financial security and certainty for a business in the event of the death or disability of a key person.
The business can take out a policy on the life of a key person to cover the business against the expensive replacement costs, or to provide cover against a potential loss.
The business has the option to insure itself against this risk in a tax-effective manner.