Imagine if your business suddenly lost its founder, CEO, CFO or top-grossing salesperson due to their sudden death. A sad and pretty devastating idea, isn’t it? The passing of an important figure within a small or medium enterprise (SME) can be especially debilitating. It might be the kind of thing that keeps you up at night, worrying about the safety and stability of your business.
Most companies have at least one employee that if lost, due to their sudden death, would leave the business in a financial and operational tailspin. If the person is a founder or other public personality, their death might have the additional impact of undermining consumer confidence. If it is a top designer or developer, some of their current or forthcoming products might suffer from costly delays until someone of sufficient caliber can be found as a replacement.
As you have surely realised, your key men, and their contributions, are very important for any business, but their loss might be felt most obviously in the day-to-day operations of a small medium enterprises (SMEs) because of their often limited capital and human resources. That’s what key man insurance is for. The death benefit provided by a key man insurance policy after their sudden death can help your business to get back on its figurative feet. It can be used to replace lost revenue, recruit replacement talent, pay off debts and more.
Who Should Be Insured?
Look at your employees and think about which one would be almost impossible to replace. Consider a founder who is identified with the company’s products and successes. If that person were to suddenly expire, it’s likely the business would lose considerable income. Those people make up your short list of possible people to insure. Other possibilities might include:
- A sole proprietor of a business
- A head chef whose dishes define the menu of a restaurant
- A chief developer whose style and ideas define the company’s tech products
- A lead salesperson with who makes more money for the company than anyone else
Business Repercussions of the Sudden Death of a Key Man
There are lots of repercussions and hardships associated with the loss of a key man for any business. These might include:
- If the key man was a partner, shares and votes getting tied up in his estate
- Loss of a key skill set
- Financial loss from clients leaving after death of a key man
- Projects stalled, delayed or cancelled without their talent or contributions
Assure Clients, Investors and Creditors
Showing that you have key man insurance to protect your key people assures your clients, investors and creditors that they are safe doing business with you, no matter what happens.
Insurance on key people may be requested by venture capitalists and other investors to insure that their investments won’t be lost if the founder, CFO or other key figure meets a sudden death.
Documents Needed to Obtain Key Man Insurance
To get the policy, you will need to determine the amount of coverage needed to make up for damages when a key person is lost. Your insurance company will request a slew of documents from you to determine the amount of insurance you need.
- Financial Records – The insurance company will request the company’s financial documents to valuate the contributions of the key person being insured. They will use these records to assess not only how much revenue the key person brings into the enterprise but also the amount needed for the business the survive if they key person meets a sudden death.
- Medical Records – The insurance company will also request the medical records to the key person to be insured to assess their health.
- The insured’s signature and consent – The key person to be insured must be notified and consent to being insured as a key person in your company. It is illegal to take out key person insurance on any employee that is not aware of the existence of the policy.
To find out more about key man insurance and other ways to keep your company safe when the unimaginable happens, find a qualified Financial Consultant on Asia Professionals Network. Check back often for more great articles that can impact your business.
This article is written by Adrian Mah from Asia Law Network.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.