If a business is dependent on an individual for the success of the company, then Key Person Insurance is worth considering.
A Key Person is someone who is essential to the company, for example, a member of the Senior Management team such as a CEO or CFO, or a top salesperson responsible for generating lucrative contracts for the business. It could also be the owner of a small business who has a key role to play in day-to-day management and administration.
In the event that this person was to suffer an injury or illness that prevented them from continuing to work for the company, the company could be at risk of suffering operationally and financially through a reduction in revenues. Often this can result in a capital injection being required to ensure the business can continue to operate prior to replacing that high value member of staff.
What does Key Person Insurance cover?
By having Key Person Insurance, a company is protected from a range of risk scenarios and could benefit from Life Insurance that will provide a financial payout in the event that the Key Person dies. The company could also receive Disability Insurance, either temporary or total, to help cover salary commitments. In the event that a key staff member is struck down with a serious critical illness, Critical Care Insurance will help meet medical costs through a lump sum payment upon diagnosis.
These are all real threats for any business that has highly valuable team members that they cannot afford to lose. Take, for example, a business that is planning to expand and takes out a loan to cover the expansion costs and hires a new senior manager to lead the company’s growth strategy. Should that person suffer an injury or serious illness and can no longer work, the company could be left vulnerable and find itself in a position where it’s suddenly unable to repay the additional debt. Key Person Insurance helps shield companies from such eventualities.
What is Share Purchase Insurance?
For businesses that have shareholders and/or key stakeholders who have a financial investment in the successful performance of the company, Share Purchase Insurance is important. It protects the shareholding interests of all parties in the event that one of the shareholders is lost to the business through death, disablement or critical illness.
In essence, when a shareholder departs the company for the reasons stated, the remaining shareholders need to be able to take control of the business so it can continue to operate and generate revenues for its stakeholders.
In addition, the departing shareholder’s estate needs to be certain that a fair value of the business will be agreed upon when selling the shares. This is dealt with under a Buy/Sell Agreement and ideally should be implemented in conjunction with Share Purchase Insurance to provide optimal protection for all parties.
What is a Buy/Sell Agreement?
A Buy/Sell Agreement deals with both the voluntary and involuntary exit of a shareholder. If a shareholder decides to leave a company voluntarily, then the value of the shareholding that is due to be paid to the departing shareholder is provided for and outlined in the agreement. The same is true of an involuntary exit.
In order to make sure that all parties to the agreement are equally protected, it’s crucial that the value and manner in which the funds are to be distributed are recorded. This removes the risk for conflict or disagreement on how the value of the shares are set and should be updated every year at the same time, for example, just after the end of year balance date when the accounts have been finalised.
It’s recommended that the ownership of the shareholder’s Life, Disability and Critical Care insurance policies are managed via a Trustee and that professional advice is sought on how to deal with taxation issues on the incoming funds for both the departing and the remaining shareholders.
How a broker can assist
Consulting a broker is a good idea for businesses that are unsure how the different insurance policies work and/or what the best cover is to protect the interests of their shareholders and minimise the risk of losing a key member of staff. Brokers have the knowledge and expertise to explain what all the risk scenarios are and what a robust insurance policy should include.
Contact an NZbrokers member to discuss your Key Person/Share Purchase Insurance requirements and how they can help.