Key Person Insurance
Does your business need it?
Key person insurance is purchased to provide some financial stability to a business in the event of a tragic and unforeseen event which results in the temporary or permanent loss of the services of a key person.
If you’ve never heard of key person insurance, you might ask what it is, and that would be understandable. There are products out there that are specifically designed as key person insurance, but in most cases it really is the strategy of deploying more common financial products which collectively can be defined as key person insurance strategy.
As an example, life insurance is often used as part of a Key Person Insurance strategy. If it can be established that a corporation’s operations are dependent on the services of a particular individual then we may be able to establish an insurable interest. This can be relatively easy in the case of the business owner/operator, but not so much where the key person is an employee or a shareholder with a small percentage of the shares outstanding.
So, if we are talking about a dentist who owns his own professional corporation we can generally determine that if he could not come to work for a period of time his business would suffer financially. The corporation may need to pay ongoing lease payments, administrative staff salaries and the like. It is pretty easy to obtain insurance to cover those risks.
Let’s say, however, the situation is not that clear. Let’s look at the case of a restaurant, where the owner is managing the overall operation, but, the success of the business is due to the creativity and skill of the master chef. We need to determine the extent to which the business would suffer should the master chef be unable perform her duties for a period of time. How easily and how quickly could she be replaced. Could just any replacement salvage the loyalty the restaurant has established with their clientele? How long would it take to rebuild the loyalty with a new chef and potentially a new menu? What would be the financial impacts during that time?
It’s these types of factors that need to be considered to determine what a business’ insurable interest is with respect to a key person. It can be difficult at times to establish that insurable interest. So it is important to work with an agent that knows the corporate market, and is prepared to work with you to make sure that the coverage your business needs is made available.
A good Key Person Insurance strategy can help secure the financial stability of a successful business, able to withstand the tragic loss of key personnel. If you are a business owner, whose business is ultimately dependent on the services you provide, or on the services of a key person in your employ, you should seriously consider the services of a good agent experienced in this field.
At Black Edge Advisory you can expect excellent advice in this regard, backed up by the resources available through one of Canada’s largest MGAs with access to nearly all related products available in the country.