Business Continuity is an (in)sure thing with Key Man Cover

In today’s challenging economic environment business leaders and owners need to recognise the importance of business continuity planning that accounts for every eventuality. Since so many businesses – particularly in the SMME sector – rely on the skills,

“Key man cover has become essential in modern business. The premature death or long-term disability of key people within a business could threaten a company’s stability, profits and future viability. Key man cover provides insurance cover against such eventualities. This cover can be taken out on the life of a dynamic employee who is integral to the company’s success, or the entrepreneur whose skills are pivotal to their own business,” says Andre Froneman, product specialist at Altrisk.

What is Key-man cover?

Key man cover refers to an insurance policy taken out by an employer on the life of an employee who is a key individual within the organisation. A key individual would be anyone employed by the business whose death would significantly reduce the profitability, stability or management of the company. This type of cover provides compensation for financial losses arising from the death or extended incapacity of the insured staff member.

The aim is to compensate the employer for losses incurred, and facilitate business continuity. Key man insurance compensates with a fixed monetary sum as specified on the insurance policy, which can then be used by the policy owner to stabilise the business. This could include covering the cost of recruiting a suitable replacement, the immediate loss of turnover that the sudden absence of the key person may cause, or the cost of training a replacement to be as productive as their predecessor.

Why should a key-person be covered?

Effective, skilled and highly qualified people are difficult to find, and successful businesses understand the importance of attracting – and protecting – such staff. These employees contribute specialist skills and knowledge that are vital to the success of the business, and are not easily replaced. Their departure from the business for any of these reasons could incur a significant financial loss to the company. Losing a key individual can:

· Directly impact the profitability of the company,

· Lead to difficulty in raising finance,

· Result in costly recruitment and training of a replacement,

· Unsettle creditors who may want immediate settlement as a result of the death of the key person,

· Threaten key client relationships.

“Key man cover provides an invaluable safety net for the company and is particularly important for owner-managed businesses whose sustainability rests in the hands of one or two individuals,” explains Andre.

How much key-man cover is needed?

“This is a difficult question to answer so the help of a professional financial advisor who understands your business is invaluable. You need to consider how much your turnover would be impacted without the key member of the team. What could the cost of recruitment or headhunting be, and how long do you estimate the process to take? Remember that, the more specialised and entrenched the person is in the business, the more difficult it will be to find a suitable replacement,” explains Andre.

To successfully calculate key man cover, business owners should work closely with a qualified financial advisor in considering the following:

· Calculate the actual costs involved in replacing the employee i.e. executive recruitment fees, training, and the cost of a consultant until a replacement is in place, etc.

· Calculate the approximate number of years it would take for the replacement to equal the key person in terms of profitability and knowledge,

· Consider a multiple of the annual salary of the key employee as a benchmark of what it would cost to replace them with someone of the same calibre.

Estate duty implications

“As the proceeds of a key-man policy are paid to the employer or business partner, it is often assumed by the insured individual that there will be no estate duty implications for them. While this is often true, there can be exceptions depending on the structure of the arrangement. It is essential to engage the services and advice of a professional financial advisor with expertise in key man cover to ensure that any estate duty implications are carefully considered and managed,” recommends Andre.

Insure your business continuity

If a member of your team is a vital part of your company’s success, to be deprived of their services as a result of premature death or a protracted illness may have a detrimental effect on your business. Key man insurance provides an effective safety net in the event of the unexpected becoming your business reality,” concludes Andre.