By Anthony O’Brien for Money Magazine
Almost two years ago, we lost my long-term Corpwrite business partner, great friend and fellow Money writer Chris Walker to cancer.
I won’t dwell on the details of his illness but, over the past couple of years as his health deteriorated, Chris urged me to apply for “key person insurance” – sensible advice given his health status.
However, I’d had income insurance for years, and deemed it would cover me sufficiently if something happened – so I ignored Chris’s advice.
But some key-person insurance would have helped our business, Corpwrite Australia, mitigate the financial tribulations of losing Chris’s unique skills when he retired in January 2016.
Key person insurance (or “key man insurance”) protects a business in the event that a “key person” such as a partner or key staffer dies, is unable to work again or suffers a serious trauma such as cancer.
As I have discovered over the past few years, when a key manager or partner is out of action, it affects profit, revenue and expenses – and even the ability to win new customers. Chris, with his wealth of experience and good humour, was enormously valuable – not least in meetings with clients.
The three most common ways in which a business is affected by the loss of a key person are revenue losses due to their inability to work, the costs of hiring a new employee as a replacement and covering any debts, says insurance comparison service iSelect.
“Key person insurance typically pays a lump sum benefit to the business to help protect it against the impact of these unexpected costs,” says Laura Crowden, spokesperson for iSelect Life Insurance.
BT, for example, offers a product called Key Person Income, which pays a monthly benefit to a business owner to replace lost income.
As I have discovered, income protection is not an alternative to key person insurance. “The easiest way to understand the difference is that income insurance protects the individual, whereas key person insurance protects the business,” says Crowden.
“Income protection will only replace the personal income of the employee or working director who is no longer able to work for the business. Key person insurance protects the business against any negative financial impact caused by the death or serious illness or injury of the insured key person.”
My reluctance to explore key man insurance was because Chris’s condition was pre-existing. He was first diagnosed with cancer in 2009. With the help of chemotherapy and, despite the advice of four specialists, Chris beat the insidious disease – or so I thought.
Unfortunately, it returned with a vengeance in March 2014 and it was at this point that Chris raised the possibility of key man insurance. Crowden says that in my situation, Chris’s health would have had no impact on my business’s ability to take out a policy. “The other partner is still eligible to apply for key person insurance,” she says.
Whether you’re a company owner or a sole trader, the message is clear: when it comes to insurance, seeking professional advice is usually a savvy move. Even though I am the last remaining director of my company, Crowden says that having some key man insurance would be worthwhile.
“Especially if your absence would have a negative financial impact on the company,” she adds.
This advice also raises the question of whether a sole trader should have key man insurance.
“Assuming a sole operator has no employees, personal income protection and business expense insurance may be more suitable options,” says Crowden.
The cost of key person insurance varies depending on several factors, including the level of cover and the key person’s age, health and occupation.
Moreover, as with any other types of policy, key person insurance has both tax-deductible and non-tax-deductible components.
“Identifying which is which can prove to be quite overwhelming and confusing and, again, seeking some professional advice will assist with your decision making,” says Fred Schebesta, from comparison site finder.com.au.
“It typically pays a lump sum benefit to the business”Anthony O’Brien is a small business and personal finance writer with 20-plus years’ experience in the communication industry.