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Key Person Insurance

March 28th, 2012 | Posted by Editor in Articles

Key Person insurance is a type of insurance which can be used to reduce the financial impact on a business due to the loss of a person by way of death or long term disability.

A Key Person could be defined as a person who has a significant input toward the profitability of that business.

The object of Key Person insurance is to provide a business with cash on the death or disability of its Key People. Essentially it is a form of loss of profits insurance to compensate the business for loss of services, skills or knowledge of those people.

Key Person insurance can be effected to protect against the loss of capital and or revenue. Where the loss of a Key Person would cause the organisation to fail to meet budgeted income projections, a policy would be effected for revenue purposes. Where the loss of a Key Person would impact the value of the business, a policy would be effected for capital purposes. The underlying reason for taking out this type of insurance has tax implications and determines if premium payments are tax deductible and if policy proceeds attract tax.

The process to implement Key Person insurance is to identify the persons whose loss would have a negative financial impact on the business, then determine a dollar value for each of these individuals as if they were an asset of the business.

Points to consider include
• What will be the cost to replace this person?
• Will their loss affect revenue and if so, by how much and for how long?
• Will their loss affect relationships with clients, suppliers and other important business contacts?
• Will their loss affect relationships with creditors and lending institutions?
• Will their loss effect moral and staff performance?
• Will their loss effect share price?
• How soon will their replacement offset the negative impact of the loss of the Key Person

Once a value has been determined for each Key Person, the sum insured is determined by using this amount and considering if claims payments will be subject to tax. If tax is applicable, the sum insured should be adequate to allow for this.

The next step is choosing an appropriate insurer and product types which include Term Life, Total Permanent Disablement and Trauma insurance which a licensed insurance adviser will be able to assist with, the completion of applications for the Key Person insurance will generally include a personal statement concerning the medical history of each Key Person. There may be other underwriting requirements such as medical examinations and blood tests. These requirements are generally determined by the sum insured.

This material is not intended to constitute personal advice, and must not be relied on as such. This information has been prepared without taking into account your objectives, financial circumstances or needs. Before making a decision based on this material, you should consider the appropriateness of this material having regard to your own objectives financial circumstances and needs. You should consider obtaining independent advice before making any decision.

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