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Examples of key persons include: A finance director who is a very shrewd ‘money manager’, the financial brains of the business and the reason for the corporate entity’s good credit standing A managing director who provides strong leadership An engineer whose ingenuity saves the firm significant money by developing improved machinery A sales and / or marketing executive who has good contacts in the firm’s markets A highly skilled mechanic who, operating in a small company environment, is principally responsible for attracting and keeping customers Cover internal indebtedness with Business insurance company entities, that are private or closely held firms, are often indebted to shareholders. These loans are often growing and the passing away of the shareholder / creditor can result in the calling up of the loan by the deceased’s estate with unfavourable results to the corporate entity. Guarantees would be invoked in the event of the passing away of the guarantor, especially where the security and the ability to repay is affected by the death of that person The term ‘key person’ refers to an employee or some other person whose contribution to the success of the company is substantial. In the absence of such an person, the company profitability would be badly affected. In this regard, an worker is a key person where the build up in skills, knowledge and experience is likely to be hard to replicate or replace as that person’s drive and vision are a most important part of a firm’s success. Insurance on a key person Business insurance coverage on a key person may be taken for the following reasons to solve some of the issues that may evolve out of a key person’s death or disability: Protection of revenues, sales, profits or any other measure of economic performance In the event of passing away or disablement of a key person, cash is received which can minimise or get rid of the potential loss to revenues, sales, earnings or any other gauge of economic performance, until a appropriate replacement is appointed. Cover liquidity with Business insurance Most organizations and businesses have liquidity troubles or a lack of liquidity, and are usually aggravated by the loss of a key individual, especially an individual who produces cash flow. Ascertaining the purpose The taxation treatment of the proceeds arising from an insurance policy will be dependent upon whether the proceeds are for a capital or sales purpose. A revenue purpose is a situation where a key person is protected because it would affect the business’ financial performance, i.e. for elements normally represented on a business’ profit and loss statement, those that reduce revenues or increase costs for its normal operations, or those that would affect its normal operations. Examples include: Recruitment costs Temporary replacement costs Training costs ?? Receivables or bad debts, as these amounts are normally revenue items
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author: Mack www.businessinsurancevic.com.au www.insuranceright4you.com.au
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