What about the reduction in capital value of the business?
- The capital value of a business can be reduced by the loss of the key person having an on:
- Goodwill – goodwill is what brings clients to the business. A key person may have specialised knowledge, unique skills, high quality business contacts or even a reputation for excellence.
- The loss of that person can adversely affect this goodwill factor.
- Credit standing – some businesses can secure credit lines more easily than others because, for instance, one director has sufficient personal assets to secure the debt. With the loss of that director, the business may find it more difficult to access or maintain lines of credit and overdraft facilities. Key person insurance proceeds give the business an alternative source of funds.
- Loan accounts – the loss of a key person who has loaned money to the business may mean that they loan must be repaid to the key person (or their estate) immediately.
- Other debts – if the business is destabilised and defaults on a loan, the financier could call in one or more of the loans made to the business.
Capital purpose key person insurance aims to ensure that the business can repay debts on the loss of the key person, easing the financial burden of the business at a crucial point in time. This will give the remaining business owners some breathing space to stabilise and maintain the capital value of the business.
What to consider
Consider how much of the current capital value and yearly capital appreciation is attributable to the key person? 50%, 20% etc?
Would the capital value of the business suffer without the key person? Even with a replacement staff member funded by key person insurance?
The capital value of the business is often determined by profitability and/or might include a goodwill component.
If the profitability or goodwill would be reduced by 50%, 20% etc. upon the loss of the key person, this will be one measure of the capital loss suffered by the business.
Business loan protection insurance is another form of capital insurance which could be considered at the same time.
What insurance products can be used?
Death, total or permanent disability, traumatic illness or terminal illness.
The sudden death, total and permanent disability, traumatic illness or terminal illness of a key person will have the most impact on the business if there has been no planning for the loss. Life insurance, total and permanent disability, terminal illness and trauma insurance cover can help protect a business should such events occur.