Gulf News September 19, 2009
22 September 2009
Gulf News: "Covering Key Figures inthe Firm"
Q: I read a recent article on Partnership Insurance and a colleague mentioned to me that I should be considering Key Man Insurance in relation to my business. Is this the same type of insurance?
Let’s step back for a moment from insurance and look at business, and more importantly why businesses are set up, and what makes them successful.
First of all, regardless of what anyone else tells you, businesses are established to make profits. These profits come from assets, and the most valuable asset of any business is its people. And the most important of these people are those with particular talents and abilities who are called “key men” – all the other assets are tools in the hands of these people.
In short the specialists in the company are all the people on whom the profitability of the business depends. If they are not there then their knowledge, expertise and skills are gone. Such a loss will not only incur costs in terms of replacement but could translate to a loss of connections with suppliers, customers, buyers and clients.
In addition their absence could result in the loss of goodwill, and a hardening, or even removal of suppliers’ credit terms. Overdrafts, mortgages, loans and other financial commitments could also be affected.
In a recent article the loss of a business partner through death or disability highlighted the need for Partnership or Directorship Insurance to enable the smooth continuity of the business, while allowing for the affected partner’s share of the value in the business to be paid out to their family.
In a similar vein business owners must think about the consequences if one of their key men died unexpectedly or was acutely disabled, and no ready successor was available.
Initially there will be panic because of the need to replace the key man quickly – followed by a period of re-adjustment during which the company will struggle on with a less-able understudy.
In the worst case scenario the situation could lead to the collapse of a sector of the business, resulting in a “wait and see” syndrome where clients refuse to buy until the situation is sorted out. In such a situation competitors will jump on the opportunity to attract customers away.
On hearing of the death of a key man, debtors may also delay payment that could result in a credit squeeze, especially if the key man had personal contacts with the lender. On top of this there will be expenses involved in finding and training a new key man, including headhunting fees and a remuneration package that is at least as good as the original.
Of course, not allof theses disasters are likely to strike a business on the death of a key man, but if even only one or two of them apply then there could be a considerable loss of profit. In the most extreme case, the loss of revenue, coupled with a clampdown on credit facilities may result in the business being forced into liquidation.
Taking out a life insurance policy on the key man, which the company pays for, is the best way to provide the necessary money to cover the problems. All the proceeds of the policy would go to the company that would be sufficient to meet the expected losses resulting from the key man’s death.
Discussing such a policy with an independent financial advisor is important with key man insurance to ensure that the right amount of life cover is put in place using the most suitable policy.
By Roy Gaunt, Chartered Insurance Broker, at Nexus Insurance Brokers L.L.C.