How your business insurance can be structured to keep your business operating even after it loses one of its key people.
If you run your own business, you know how valuable the key people in your business are to its ongoing operations and your future growth. But, what would happen if one of your key people could no longer work because they became totally and permanently disabled or they died? Unfortunately, we see this all too often at Aspire Risk Advisers.
While it can be unsettling to think about these scenarios, having the right business insurance in place will make sure your business continues running even if you or one of your key people can no longer work. Let’s take a look at how this kind of insurance can be structured for your business.
Who is a ‘key person’?
A key person in your business is any person who, due to their employment in the business, provides significant revenue and plays an important role in ongoing operations. The roles of these people may include:
- Managing Director
- A Director who is a guarantor on the business’s loans
- An employee with specific revenue-generating expertise
- Senior sales people.
What happens if you lose a key person from your business because they can no longer work?
If any of these key people could no longer work in your business, during the time it takes to hire a new person and overcome the other challenges of keeping the business operating, a significant amount of your business’s revenue could be placed at risk or worse; lost. For example, if a business principal dies a lender may call in a loan if it has reason to believe the business can no longer service the loan. Without the right insurance coverage in place, your business may be forced to sell assets to pay the loan at short notice.
The key objectives of having insurance in place to protect the business in case one of its key people can no longer work are to:
- replace lost revenue; or
- protect business assets by providing funds to service outstanding loans.
How the right insurance can protect your business
Here’s an example of how the right insurance can keep your business operating even if one of your key people can longer work.
Locks & Curls Pty Ltd
Jen and Naomi are directors of Locks & Curls Pty Ltd, a hairdressing business. The business has recently borrowed $500,000 to purchase another shop as part of its expansion plans and Naomi is a guarantor for the loan.
Locks & Curls establishes a life insurance policy providing $500,000 cover. The company owns the policy and Naomi is the life insured.
A number of years later, Naomi dies and the lender requires the loan to be repaid.
Outcome: The proceeds from the life insurance policy allow Locks & Curls to repay the loan immediately, without having to sell the new property or any other significant assets.
Cook-it Pty Ltd
Malcolm, Allison and Luke are the principals of Cook-it Pty Ltd, a family owned and operated business which specialises in manufacturing commercial cooking equipment. The business recently borrowed $400,000 to purchase new plant and equipment for its factory. Malcolm is the guarantor for the loan.
When Malcolm dies, the lender requires immediate repayment. With no insurance proceeds, Cook-it is unable to repay the loan and is forced to sell a number of significant assets at short notice to avoid liquidation.
Outcome: The financial position of Cook-it Pty Ltd has substantially deteriorated and it may take many years to recover.
How you can protect your own business
We all know insurance becomes most valuable when you need to make a claim. With the right insurance structures in place, you can be assured that your insurance will cover you when you need it most. Our Claim Management Service also helps you navigate the claims process to make sure you get the best possible result to protect your business.
The information in this article is of a general nature and does not take into account your own financial objectives, circumstances or needs. You should consider your own personal situation and requirements before making a decision. If you have concerns or questions, please contact Aspire Risk Advisers.