Find Key Person Insurance with Cover for Revenue Protection for Your Business
How would your business cope if you lost a crucial employee to disability or death? Would you be able to survive the loss in profit resulting from the unplanned departure of a key person, or would it wreak havoc on your best-laid business plans?
Key person insurance, also known as key man insurance, is designed to protect your business against the loss of a worker that is integral to your business. This type of cover is suitable for small businesses right through to large organisations, and offers your business cover in case you lose anyone who provides the company with a direct and substantial economic gain.
For large organisations, key person insurance helps them deal with the loss of a key employee. As the loss of a key person can have a detrimental effect on profitability, insurance is designed to help overcome this loss. For smaller businesses run by partners, it protects each partner from financial difficulties.
This type of cover is an essential consideration for all business owners, and taking the right steps to ensure workers are adequately covered can help protect the financial stability of your business.
What are the benefits of having key person insurance in place?
There are many benefits to taking out key person insurance, including:
- Security for your business. Having this type of cover in place ensures that your business will be able to cope with the loss of a key employee. Certain knowledge and experience can only come from certain team members, and a key person insurance payout can help you cover this loss.
- Affordable cover. Premiums for key person insurance are generally quite affordable and are fully tax-deductible as well.
- Help with finding a new employee. The benefit payout from a key person insurance policy can be used to fund the recruitment and training of a replacement employee.
- Repay debts. The benefit payment can also be used to secure the financial position of your business, either by paying off outstanding debts or investing the funds elsewhere for business growth.
- Ownership transition. Depending on the size and type of your business, the benefit payment can be used to help your company transition to new owners, or perhaps to purchase the deceased person’s share in the business. It can even be used to offer salary continuation to the spouse of the deceased.
- Flexibility. When taking out key person insurance cover you have the flexibility to pick and choose which employees to insure. This helps tailor the cover to the special needs of your business.
- Attractive to prospective employees. Employees are the most important asset of any business, and key person insurance is seen as an attractive employee benefit. This can help you retain key members and attract new employees.
How does key person insurance provide revenue protection?
As the name suggests, key person insurance for revenue protection is designed to protect the financial position and strength of your business. Key person revenue protection policies feature a range of benefits, including compensating your business for any loss of revenue resulting from the unplanned departure of a key person.
A payout from this type of cover can be used to protect your business profits and maintain the value of your business, while it can also cover the cost of finding, hiring and training a suitable replacement employee.
Businesses are typically able to take out a key person revenue protection policy for death cover, trauma cover and total and permanent disablement, offering security in the event that one of your employees falls victim to an unexpected tragedy.
In order to assess how much key person insurance for revenue protection you need, you can take into account factors such as:
- The key person’s salary
- The cost of finding, hiring and training a replacement
- The annual profit or revenue that the key person contributes
How is it taxed?
The premiums for key person insurance for revenue protection are generally tax deductible, while any benefit your business may receive is usually also assessable for tax purposes.
If, however, the key person insurance is designed for capital protection rather than revenue protection (for example the benefit will be used to repay debts or compensate for any loss of business goodwill), the premium will most likely not be tax deductible. And if the insurance is held for a combination of revenue and capital protection purposes, premiums are generally not tax deductible.
Capital Gains Tax will apply to any TPD or Trauma benefits the business receives. You should also note that if you make a claim and your business is later audited by the Australian Taxation Office (ATO), the ATO will compare the stated purpose of your insurance cover to what the benefit payment was actually used for.
Make sure to seek the advice of an accountant before taking out any cover.
Keyperson Insurance Revenue Vs Capital Protection
As mentioned above, your business can take out key person insurance cover for two purposes: revenue protection and capital protection. These may initially sound like two quite similar purposes, but each approach has its own intent and influences where any benefits will be spent.
- Revenue Protection: Revenue protection guards your business against loss of revenue resulting from a key person’s inability to continue to play a role in the business due to death, critical illness or total and permanent disablement. It also covers the cost of hiring a replacement and any loss of revenue due to any resulting business down time.
- Capital Protection: Capital protection, on the other hand, is designed to help your business cope with cash flow issues resulting from the loss of a key person. This type of cover can be used to repay debts and compensate for any loss of goodwill. Another purpose of this cover is if the key person who is no longer part of your business was the guarantor on a business loan—if the creditor requires you to repay your loan as a result of this, you’ll need to have access to sufficient funds to make the necessary payment.
Interested in applying for cover?
As well as the differences in terms of taxation mentioned above, both capital protection and revenue protection will have different benefits for different businesses. An insurance consultant can help you find appropriate keyman insurance options to provide adequate cover at an affordable price.Picture: Shutterstock