It is said that the most important asset in any business is its people, writes financial advisor Pieter Willem Moolman.
In every business, however, there are those individuals who have a more significant impact on its future income and profits. They are known as key persons.
Not just any employee can be identified as such. A key person is someone whose absence, whether through death or disability, will severely affect the future profitability and sustainability of the business.
A key person can be likened to a leading lady in a movie, such as Nicole Kidman in Moulin Rouge – without her the show cannot go on.
Key person assurance refers to a policy instituted by an employer on the life of an employee. Its purpose is to compensate the business for the loss it would suffer on the death or disablement of one of its valuable employees.
Examples of the losses a business could suffer include a direct loss due to decreased sales, high employee replacement costs and opportunity costs (loss of profit/sales) while the replacement is being trained.
Key person insurance is a simple and cost-effective solution that provides a business with cash to withstand disruptions. It also protects existing credit facilities and makes the necessary funds available for the recruitment and training of replacements.
It is often difficult to establish the key person’s value to the business and, consequently, the amount of key person assurance to get. Various methods can be used – some approximate, others more accurate – to determine the amount of cover required.
Your financial advisor can assist you in determining the value of your key employees and put the relevant insurance in place to provide for you and your business.
Make sure you identify your most valuable employees and take out key person insurance on them this year, because, when that person is no longer there, the show must go on.