BUSINESS PROTECTION - Key Person Insurance (Asset and Revenue Protection)
When asked what their most important assets are, business owners invariably think
of physical assets. They are valuable to every business, but it's the intellectual
capital provided by the key people - like you and your business associates - that
employ these assets to generate the business's profits.
These key people are the most important assets of the business, and their continued
contribution is critical to the long term success of the business.
The Problem
A key person's death or disablement can result in financial loss more disastrous
than any loss of, or damage to, physical assets. Material things can always be replaced
or repaired. When a key person dies or is disabled they are lost to the business
forever, which can create the following immediate financial problems for the
business:
Asset preservation
Without the security provided by the key person, the business may be forced to sell
assets to maintain cashflow if creditors press for payment and debtors hold back
payment. Customers and suppliers may not feel confident in the trading capacity of the
business, and its credit rating could fall if lenders are not prepared to extend credit.
Outstanding loans owed by the business to the key person may also be called up for
immediate repayment.
Loss of revenue and replacement costs
A drop in revenue is often inevitable when a key person is no longer there. Losses may
result while finding and training a suitable replacement, from demand that can't be
met, errors of judgement by a less experienced replacement or through the reduced morale
of employees. If there isn't a suitable replacement within the business it may take
substantial time and financial inducement to find and train a successor.
The Solution
To overcome these financial problems, following a key person's death or disablement,
a business would need a readily available cash reserve. For most businesses, this
presents a funding problem. Not only would it generally take many years to
accumulate an adequate cash reserve, but the key person's premature death or
disablement would almost certainly result in insufficient accumulated cash.
Business protection insurance can provide the required cash on a key person's death or
total and permanent disablement, or their diagnosis of a critical illness, and at only
a fraction of the cost of alternatives.
Compare the Alternatives
There are other ways of raising the required cash but each has its drawbacks:
Realising business assets
The forced sale of business assets could result in substantial losses. Furthermore,
they are generally required to generate income or may have already been put up as
collateral security.
Borrowing the cash
Borrowing the cash is an option many businesses could consider, but lenders may not be
prepared to extend credit after a key person's death or disablement because the future
of the business is uncertain.
Creating a contingency reserve
Creating a contingency reserve would mean locking away critical working capital
otherwise available to the business.
Absorbing the financial loss to the business from current profits
This can be risky because it assumes profits will be sufficient to absorb the loss.
Summary
Asset protection can provide the business with sufficient cash to preserve its asset
base, i.e. to repay debts, free up cashflow and maintain its credit standing, if a key
person dies or is disabled.
Revenue protection can provide the business with sufficient cash to compensate for
the loss of revenue and associated replacement costs, if a key person dies or
is disabled.
