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Insuring your key people

As a business owner, your business becomes an integral part of your life. Working long hours, investing your savings, and forfeiting your own salary to increase your business cashflow are just some of the sacrifices you make.

When you ask most business owners what their most valuable asset is, you will find it’s not their building, equipment or vehicles, but their employees. So what would happen to your business if you or your business partner died suddenly, suffered a trauma or became permanently disabled?

Key Person Insurance enables your business to claim compensation for any financial loss suffered if an insured incident occurs and results in a nominated key person being unable to work. Without key person insurance, a business may suffer from the potential loss of key clients, reduced business growth and development, and the loss of goodwill. Furthermore, the business will need to replace the key employee and most likely have to train the replacement.

So who would you consider a key person in your business? It could be a manager, director or sales executive.

Case Study

Jack and Bill have recently purchased an established hardware supplies company for \$1.8 million.

They bring complimenting skills to the business; as Jack has experience in managing stock and Bill is great at marketing and sales. They are equal partners and shareholders (\$900K each); and they each have a wife and children.

Jack and Bill were referred to Core Wealth Advisors by their accountant to assist in implementing Share Purchase Insurance as part of the Business Succession Plan. Appropriate values were determined and the Agreement and Insurance were put in place.

After 17 months of successful operation, Bill is out on the road seeing customers. He is in a horrific accident on the highway and after three months of surgery and rehabilitation, is unlikely to ever gain full use of his legs – he is diagnosed to be totally and permanently disabled and cannot return to the business with Jack.

Upon consulting with Core Wealth Advisors in relation to the agreement and claim, Bill’s insurance policy is triggered and the Share Purchase Agreement allows the transfer of his shares in the business to Jack ($900k), whilst providing Bill and his dependants with a lump sum benefit to assist with ongoing income and lifestyle requirements ($900k). Thankfully, Bill had also taken Core’s advice to implement an appropriate Income Protection policy; providing him with 75% of his pre-disability monthly income to age 65.

In this case all parties have received the desired outcome, as Bill’s wife had no desire to be in the business with Jack. Similarly, Jack did not want to have to work with Bill’s wife and he now has 100% ownership and control of the business.