KeyPerson Insurance - When your photocopier is deemed more valuable than your CEO

Different organisations hold different views on what “assets” mean. Ask any accountant and they will probably tell you that “assets = liabilities + owners’ equity”. Many business owners adopt the view that “assets = customers + more customers + even more customers”. However, should we not take “assets” to mean “anything that is of value”?

From small firms to large companies, almost every business undertakes some form of insurance of their physical assets such as manufacturing facilities, plants, machinery, stock inventories, and office premises, helping to mitigate potential financial losses that arise from natural and manmade disasters. So, this begs the question, why is it that 27% of companies have office equipment protection but only 13% have key man insurance of any kind?

In other words, while companies understand how important their key men are, their behaviour suggests that they deem their office equipment to be more important.
 

Who should be regarded a key person?

Very few companies cover themselves against the loss of their most important assets, the “key executives” of the company i.e. the person(s) at the helm who provide financial and strategic direction to their businesses, as well as individuals who hold special relationships with clients or contacts – in other words, individuals whose presence in the business is integral to its continued success.

The key to determining if an executive is a key person rests in asking a few key questions:

• Will the business be seriously impaired without him/her? • Does he or she have unique skills that would be very hard to obtain in the industry? • Does he or she have a special role or relationship with regard to a few key, large accounts? • Will his or her absence from the company affect its stability in any way?

27% of companies have office equipment protection but only 13% have key man insurance of any kind.

 What are the risks?

Several facts illustrate the risks quite readily:

•	In a scenario with four key male employees, there is a 29% chance that one of them will die before retirement and a 68% chance one will suffer a critical illness.
•	70% of entrepreneur-owned businesses do not survive their founder.
•	65% of companies in a recent survey felt that the death of a senior employee would have severe impact upon their business, while 57% felt that if a key employee were to be off work due to health reasons for half a year, their business would be seriously affected. However, just under a fifth of senior employees had actually purchased cover.

The above illustrate the likelihood of health risks faced by a company’s key men, and despite understanding the risk and potential financial losses, they do nothing to purchase cover for them; while more often they continue to protect their photocopier.

When is key person insurance warranted?

What kind of business should have key man protection as part of their overall risk and insurance programme? Large corporations have many stakeholders who contribute to the stability of the business; smaller companies rely even more on their key managers – the business can easily fail without them.

	How it works: The business decides to purchase key person insurance; the more common way to do this is to purchase cover at a rate that is five to 10 times the employee’s annual compensation. Another is to determine the amount which the key person contributes to business earnings and then make an estimate. The business then becomes the owner and the beneficiary of the policy insuring the key employee’s life. Upon the death of the employee, the employer collects the proceeds and uses the cash as management sees fit.

In the unfortunate event that the key person really does succumb to illness or injury and is unable to perform his duties, the business can use the payout from the policy for the following: 1. maintain the daily operations of the business; 2. assure stakeholders of business stability by having a smooth transition, using the money to find a suitable replacement; 3. ensure that customers continue to be satisfied with products and services; 4. protect goodwill and supplement profits suffered from the event.

Key person insurance ensures the stability and profitability of the business, by insuring against short run capacity and the possibility of losing key employees.

The bottom line

Taking up key person insurance cover makes perfect sense for businesses whatever the scale; it ensures the stability and profitability of the business, by insuring against short run capacity and the possibility of losing key employees. It is a cost-effective method of protecting your business as well as its stakeholders.

Most companies purchase cover for their office equipment. It is ironical that they do not purchase cover for their key talent, the company’s most valuable asset.