Business protection is the key

Protecting your business against the loss of any key person can be daunting. Where to start? Who is classed as a key person? What would the impact be to the business? What are the differing terms of policies? Keith Pressler from Taylor Patterson advises.

Protection can help the business from any financial fallout of any key person dying, falling terminally ill or, provided critical illness cover has been taken as an optional extra, falling critically ill during the term of the plan.

Whether they provide knowledge, key contacts or other assets such as funding, losing a key person can be detrimental to any organisation. The business could be hit by a reduction in sales resulting in loss of profit, not to mention the potential recruitment and training costs that could be incurred to hire a replacement, these are just a few of the pitfalls that need to be considered.

So what types of business protection exist?

Key person Insurance Sometimes the hardest question to ask is who is identified as a ‘key person? Common examples include, managing director, finance director, sales director, technology specialists or other staff with specialist skills.

Knowledge and relationships are fundamental to the running of any business and if someone with this level of skill passes away the economic impact can be devastating. Having a plan in place for this can be the key to survival for a business. If anything unfortunate were to happen the insurance policy pays out a lump sum to financially recompense the business and stabilise it in a period of uncertainty.

Depending on the level of cover, individuals may need to review internal policies such as travel in order to reduce levels of risk. For example, if 5 key personnel are all travelling together and something unfortunate happens, the level of risk is quite high, certain plans may request the risk is mitigated by only 2 members of staff travelling together in certain circumstances,

However, it’s interesting to note that not all key people will be shareholders within a business, so how can shareholders be protected?

Shareholder protection Although shareholders may not possess a specialist skill, they do hold an influence in the direction of a business. If a shareholder were to pass away, the remaining shareholders may not want the shares passing to a non business related person such as family relatives with little or no understanding of the business.

In cases like this the insurance policy ensures the shares revert back to the business, with the spouse/partner getting the cash lump sum of the value of the shares. Legal advice is necessary to draw up a shareholder agreement in these circumstances so organisations have the option of how those shares will be divided upon death.

Whatever policy is put into place it is worth reviewing annually. Not only do insurance policies and terms change, rates can go up and down dependent on market conditions. Just as policies can change, the value of the business will also vary so policies might not be up to date with current value. If key personnel have received training over the time period, their knowledge and expertise might mean the business needs more financial compensation upon unfortunate events.