Running a business comes with its fair share of risks, and one of the most critical is people risk. Business owners and other key people with unique skills, knowledge or leadership qualities are vital to the success and stability of a business, and their loss can have serious financial implications.
The emotional hardship is difficult enough, let alone the implications for revenue and profitability. Key person insurance mitigates the financial impact and protects your business during a very challenging time.
Preparing for the unexpected
Key person insurance can play a vital role in managing a range of situations that can impact a business. It can safeguard a diverse range of individuals and circumstances.
Consider how the following scenarios might affect your business:
- A top sales person is diagnosed with cancer and has to cease work for an extended period while undergoing treatment and recovering.
- A shareholder has a heart attack and passes away.
- The CFO is involved in a terrible car accident and is disabled and unable to work.
Examining a case study
Now let's take a look at how it works in practice, using a hypothetical case study.
Jones Manufacturing Co. is a successful manufacturer with a strong reputation in the industry. John Jones is the company's founder and CEO. He's instrumental in leading the design and operations, and holds a majority shareholding in the business.
The challenges
Tragedy strikes when John unexpectedly passes away from a stroke. His loss creates a dual challenge for Jones Manufacturing Co:
- The financial impact of losing a key person
- The disruption to the company's ownership structure
Revenue protection
Fortunately, the business had the foresight to take out a key person insurance policy on John's life. When John dies, this policy pays a capital benefit to the business to offset loss of profits and fund the recruitment and training of a new technical specialist. The funds also allow the company to invest in additional training for existing employees. This ensures that projects continue smoothly, safeguarding the company's reputation and providing financial stability.
Equity ownership protection
The business had also secured equity ownership protection. The insurance policy provides a payout that, in conjunction with a buy/sell agreement, allows the remaining shareholders in the business to purchase John's shares from his estate. The payout ensures a smooth transition of ownership, preserving the company's stability and avoiding potential conflicts with John's family, who inherited his equity.
The outcome
The key person policies prove invaluable by providing financial resources to navigate the loss of their key person and mitigate the impact on the business's equity and profitability.
This hypothetical case study serves as a powerful reminder of the importance of proactive risk management and highlights how key person insurance can protect businesses from the unexpected loss of critical individuals.
How Gallagher can help
At Gallagher, we're experts at protecting your business's most valuable asset: your people.
Our specialist advisers can help you structure a key person insurance program to plan for life's unexpected events, working with you to protect your assets, revenue and equity during a challenging time.
