Basic Rules for Protecting a Business

Basic Rules for

Protecting a Business

Don’t know where to start?
Here are some basic guidelines to follow when looking to protect your small business.


Always Protect the Costs-to-Stay-Open-for-Business first

The costs to stay open for business are the 'fixed overhead costs' and are often contractual in nature. Make sure you have 12 months of fixed-cost funding on hand, just in case, so you can have a business to come back to after you recover from an unexpected sickness or accident, or so you can have an active business to sell as an ongoing concern if you have not yet recovered after 12 months. Insuring the Fixed Overhead Costs reduces the risk to a small business.


Always Protect the Key Revenue Maker

The biggest risk to a small business is usually its overreliance on its Owner. Whether the Business Owner, a Specialist Expert or a Key Person, most businesses derive the bulk of their revenue from a few key individuals.

Insuring the Key Person to the business protects a business from the financial dips that can occur if there's an unexpected loss of an owner, manager, partner, or skilled employee through sickness, injury or even death.


Always Protect the Business Debts

Businesses use debt to start-up or to grow. Whether these funds are supplied by the owner (Directors Loan Account) an external funder (using 1st mortgage security over property assets) or investors (usually a combination of mortgages and Director Personal Guarantees), nothing stops a business like an unexpected and immediate call-up of debts, well before they're expected to be repaid. Nothing stresses a business and its suppliers as having difficulty meeting its loan and debt obligations. Insuring the Business Debts & Liabilities from sickness, accident, or even death of the Owner, Business Partner or Key Person reduces the risk to a small business.


Always Protect the Business Ownership

Owning a business in Partnership with another means all the Partners need to protect their portion (equity investment) in the business to make sure the future control of the business stays with them. A forced change in ownership, due to one or more of the partners unexpectedly suffering a motor vehicle accident, ill health, or even death and then selling their shares, could destabilise the business ownership and risk its future. Protecting business ownership with a Partnership Agreement, Company Powers of Attorney and Insuring the Business Ownership, help reduce the risk to a small business.


Find a Risk Adviser specialising in working with Small Business Owners and their Families

Protecting yourself and your family from the risk of running a business is key to business and family harmony (and peace of mind). This is because small businesses and the families that support them have different risks, liabilities, and time constraints than average employee-based families. The team at Sapience Financial specialise in working with small business owners and their families, Sole Traders, Partnerships and Multi-owner business, and their Companies to help them protect themselves from their business.

Fixed Business Expenses Insurance OR Key Person Replacement Insurance explained

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Are you protecting your business's key revenue makers?

It’s a well-known fact that, as an employer, your most valuable assets walk out the door every night. Many small businesses often rely upon the skills and knowledge of just one or more Key People for generating the bulk of their revenue. These are usually known as Key Revenue Makers or Key Persons in the business.

This means a sudden sickness or illness, a disability or even an unexpected death of a Key Person could cripple a business until they find and train a suitable replacement.

  • Many small and medium (SME) business owners are also the Key People in their businesses.
  • If they were unable to work in the event of illness or injury, a replacement employee is often required, at least in the short term.

What is Key Person insurance?

Key Person insurance helps safeguard a business against the financial impact of the loss of a key individual – of your most integral employees – who are unable to work due to a sickness or injury or a critical or terminal illness or has unexpectedly passed away during the length of a policy.

Key Person insurances refers to the package of insurance products and strategies designed to protect a business in the event of the loss of a key person who makes a significant contribution towards the profitability of the business.

Broadly speaking, there are two types of Key Person Insurance - Income Replacement and Value Replacement

  • Key Person Replacement (KPR) provides a short term solution to a help a business fund the cost of a replacement where the business owner is a key person in their business, and a replacement is required if they are unable to perform their duties during disablement. It can reimburse up to 75% of the direct remuneration costs associated with a replacement employee or locum (for up to a maximum of the insured monthly benefit) while the life insured is unable to work due to sickness or injury and is totally or partially disabled.
    • For the high-quality covers, any income generated by the locum or replacement employee does not offset the insured benefit payable.
  • Key Person Value (KPV) insurance can compensate a business for direct remuneration costs if their Key Person were to suffer a critical illness or unexpectedly pass away.
    • Direct remuneration costs include salary, wages, packaged fringe benefits, regular bonuses, regular overtime payments, pre-tax superannuation contributions and payroll tax.

Key persons do not exist in all business circumstances

Not every business or business structure has a Key Person. For instance, a sole trader can never insure themself as a key person because the business would cease upon their death or total disability.  In such circumstances, fixed business expenses cover may be considered.

Your Sapience Financial adviser can help create a suitable strategy to meet your individual business needs.

Designed for the business and its stakeholders

It's about giving your business stakeholders, the owners, the staff, and their families, the confidence that your business can survive and thrive even in the event of losing a key person through death or a specified critical illness.

Key Person replacement insurance cover provides a short-term solution to help the business fund the cost of replacing an employee.

  • Key Person Insurance can protect businesses from the financial dips that can occur if there's an unexpected loss of an owner, manager, partner or skilled employee.
  • Participation in some critical supply chains may require a business to supply a capacity statement that identified Key People and may stipulate that Key People to a business are appropriately insured against the costs of sickness, injury or death, to the business too
  • Participation in a business Partnership or Shareholder funding may require a business to hold appropriate Key Person insurance cover.

Insuring your business's Key Person can provide funds to offset a reduction in the business cash flow that may occur due to an unplanned absence from a serious sickness or injury and may even provide funds to source a locum or find and train a replacement.

Most small businesses haven't considered enough their vulnerability to their reliance upon a Key Person and have no backup plan for the loss of that Key Person.

What's the difference between Life insurance and Key Person insurance?

The difference between Life Insurance and Key Person Insurance is simply the ownership structure of the policy.

  • Traditional life insurance protects the family of a person who takes out an insurance policy.
  • Key Person insurance is paid for by a company as a business expense to protect its ability to replace and cover the loss in revenue an absent person would otherwise have provided, and as such any claims benefits are paid to the business that took out the policy.

Simply put, Key Person Insurance pays a benefit to the business, rather than the insured person or their family.

Who are the Key People?

Anyone whose unexpected absence would leave a major void in the company day to day operations.

  • Specialist skills: a business in the formative stage may heavily rely on the skills and abilities of one or a few individuals, such as a restaurant head chef, medical practitioner, practice manager or sole accountant.
  • Operations: a business considering major changes or merges may be more vulnerable to the loss of specialist skills particularly those for which the business depends for the change or merger.
  • Resources: a smaller business may depend upon a small group of people sharing their individual skills and pooling their network of expertise to form a partnership.
  • Brand: The business founder or head who is closely linked to the brand's image of the business and success in the minds of the general public, suppliers, distributors, customers and other stakeholders.

Or to put it another way, what responsibility might a key person have?

Anyone who is a business owner (or an arms-length employee) with specific skills or knowledge who is working in the business to generate revenue and whose absence from the business would result in significant loss of revenue as the business continued to operate, can be a Key Person and Key Revenue Maker to a business.

Examples of Key Person insurance at work

Key Person Insurance | Shannon's Story

 Shannon's case studyShannon was a CEO and founder of a specialist company that attracted a particular type of tech investor. His larger-than-life personality and technical insights meant his profile within that industry was strong and responsible for his company's growth success.

While he was the primary shareholder in the business, he had 3 investors who each invested $300,000 to fund the growth strategy. The shareholder agreement specified the business would be required to hold Keyperson style insurance to cover the shareholder's investment upon the death or disability of the founder CEO.

In addition to the investment of $900,000 the cost to replace the founder (in the event of his becoming absent from the business) was $295,000 made up of international recruitment fees, salary costs, and the cost of a year's fixed overhead runnings costs for the business. As part of a protection strategy, the following policies were put in place.

  • Keyperson Life insurance $900,000 + $295,000
  • Disability insurance $900,000 + $295,000

A year later after coming back from a month's Skiing trip to Japan, Shannon tripped while walking down the fire exit stairs at the company office and broke both his wrists in the process. Thankfully he didn't lose his life or his company, just some dignity.

The Key Person insurance stabilised its income during this period until he returned to work at full capacity.

How we can help

Key Person and Key Revenue Maker Insurance is an important part of protecting your business and your family, from the business.

Contact us for a confidential chat about your needs.

Related: Types of Business Insurance products we work with

There are lots of different types of risk protection insurance that can help in different situations.

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