RSM New Zealand

Key person cover

Key person cover – is your business vulnerable?

One of the most common forms of risk within a business can often be overlooked. This is when a person responsible for a high percentage of the business revenue (whether an owner or an employee) is no longer able to perform their occupational duties. 

These people are generally referred to as ‘key’, and are recognised as having knowledge, work experience and business contacts which are considered unique and valuable to the ongoing success of the company.

A business owner is usually careful to keep plant, stock and building insurances up to date, but is often unaware of other insurance options that are available to protect the cash flow of the business whilst a key person is unable to work.

If a key person suffers a serious illness or injury that keeps them away from the business for an extended period of time, the business is not only required to fund and train a replacement person, but also ensure that other business costs are met, to maintain their profitability. For some businesses, this can be virtually impossible when the event occurs unexpectedly.

If no prior planning for such an event occurring has been done, the ongoing effects can potentially result in the eventual liquidation and closure of the business and the employees in the company losing the livelihood which supports themselves, their families and community.

Business revenue protection contracts have evolved over a period of time and are continually being enhanced to ensure they are meeting the needs of the business owners. Whereas in the past it was common to have to prove ongoing expenses and company loss at claim time, there are now contracts available which can agree at application time to pay up to sums of $60K per month direct to the business.

As a key person or revenue protection cover is paid to the business, it is important that individuals whose lives are insured on these contracts understand that this is not their personal insurance, and the money in the event of a claim will not be paid directly to themselves, but rather to the business.

 If the purpose of the contract was to provide an ongoing salary from the business to the key person, this should be documented in their shareholder or employee agreement, when the contract is put in place, to avoid any confusion at claim time.
When considering this type of cover, it is always recommended that you seek advice from professionals, including your accountant, lawyer, and risk insurance advisor, to ensure that any contract put in place suits the purpose it was intended.

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Authors

Grant Hally
Partner - Auckland
Steve Young
Partner - Auckland