In 95% of the key person insurance plans that I have set up for clients, it is because a bank had requested it before they give a loan. Key person insurance has a lot more benefits than just that and company owners should be looking at using it a lot more to protect their company.
Who is a key person?
It may be a:
Key employee
Director
Partner
Consultant
Why would a company need key person insurance?
Banks get jittery at the thoughts of one of the main drivers behind a business not being around to keep the company profitable and pay off its debts. They want to make sure the company has insured the director or partner so they can afford to repay the loan in the case of premature death.
Personal guarantees may have been given on the loan and it becomes repayable on death.
Work on a vital project may stop, leading to a loss of profits.
Company contacts could be lost, leading to a loss of sales and new business.
There could be a loss of specialist knowledge that is difficult to replace. The first key person insurance plan I ever set up was for a man who featured in Time magazine’s Significant event of the Century.
How much key person insurance does the company need?
The company is not supposed to profit should a claim be made. The key person insurance is for loss of profits and/or to repay loans that may have to be repaid on the death of the key person.
Does your company need key person insurance?
Key questions to ask before deciding whether your company needs key person insurance.
Is there an individual with specialist knowledge that the company relies on?
Would the business survive without replacing that specialist?
If they died, how long would it take to find or train someone to that level of specialist expertise?
How much would it cost to replace that individual? Where would the company get the funding?
Has the key person provided loans to the company? Or have they given personal guarantees on a business loan?
Do the loans become repayable on death?
Are the loans already protected?
Does the company have the capital to repay these loans if they were called in?
