What is Key Person Insurance?
If you are a small business owner, you need to think about Key Person Insurance. In fact, it may well be a better and more useful insurance option for you than income protection insurance.
Key Person Insurance is ideal for small businesses who have one or two staff who are key revenue generators, or whose work is vital to fulfilling contracts and keeping the business running.
Their absence, whether by serious illness or injury, could have a devastating impact on a company’s financial wellbeing. Key Person Insurance ensures you are well protected, should this situation occur.
While income insurance is vital for those in paid employment, if you are a business owner, key person insurance may well be a better option.
How is Key Person Insurance different to Income Protection?
Key Person Insurance, also known as locum replacement cover, pays the sum insured to the business to cover the cost of a replacement staff member, while income protection insurance is designed to cover your personal income.
Key Person Insurance is an agreed value, whereas income protection has an offset clause – meaning if you claim ACC, you cannot also claim income insurance.
With some income insurance policies, you also need to prove your current income to the insurer at claim time. This can be a challenge for business owners and those self-employed who, on paper, can appear to have a relatively low income. Key Person Insurance pays an agreed value.
When is Key Person Insurance a better option?
To decide if Key Person Insurance could be appropriate for you, you must identify the vulnerabilities in your business.
Imagine you are suddenly unable to work because of an illness. You need to take four months off running your company to recover. Will your business survive without you and still be there when you are ready to get back to work?
If the answer is yes, then income insurance protection is likely to be the most appropriate insurance option
However, if the answer is no, then Key Person Insurance may be more suitable
Key Person Insurance would allow you to hire someone to replace you while you are incapacitated. This means your business would be kept running, and you, as the business owner, will still have an income.
Who should be identified as a Key Person?
Key people tend to be business owners, specialists, or personnel responsible for critical customer relationships. A business can take out Key Person Insurance on any employee they consider to be a key person, within certain parameters.ACC has a table showing replacement cost for a wide range of professionals, updated yearly, here. This can be a good tool to use to make a case to an insurer for the level of coverage you need for a key person.
Talk to the experts to find out the best option for your business
Deciding which insurance cover to get can be complex, and if you are paying fixed premiums you need to know exactly what you are getting at claim time. The best way to take care of this is to talk to a professional adviser. We can work through different scenarios and we know the products available inside and out, and can work with you to get the best cover. Contact one of our advisers today.