Your business may rely on one or more key people for its day to day operations and continued profitability. If so, their death, disability or diagnosis with a specific medical condition could affect the revenue of your business, and you may need to find and train a suitable replacement.
Having the right insurance in place can be critical soon after the loss of a key person, and in the months that follow.
Who is a 'key person'?
A key person is someone who is critical to the financial wellbeing of your business through their continued association. Key people play an important part in generating the revenue for the business, and/or obtaining business loans.
Here are some typical examples of key people:
- Director, Managing Director or CEO
- Partner in a partnership
- Employee with a particular skill or technical expertise
- Senior sales manager.
Think about the people associated with your business that you would consider to be key people. For each person, what would be the impact on your business if that person died or became permanently disabled?
The death or disability of a key person could have a significant impact on the sales of a business and/or the ability of a business to continue to repay its loans.
You should take some time to consider how your business might continue to pay its expenses if this happens. There are a number of methods that you might consider:
- Use existing cash reserves, if any
- Draw down from existing loan facilities
- Sell some of the business assets
- Weather a period of reduced profit.
However, for many businesses, these options are simply not possible or too expensive.
If one of your key people dies or becomes permanently disabled, you may need to find (and even train) a replacement. In the meantime however, your business revenue could fall significantly.
A sudden reduction in revenue can affect the ability of a business to pay its day to day expenses, and could ultimately threaten its survival.
Anthony runs a small structural engineering firm, BluePrint Pty Ltd which provides services to a number of corporate clients and councils. Gary is a key employee of the business and clients rely on him for his technical expertise in solving difficult design problems.
Anthony realises that Gary is critical to the immediate survival of his business and estimates that it would take him 12 months to find and train a suitable replacement if Gary died or became permanently disabled. Further, Anthony has estimated that if Gary was unable to work, net profit of the business would fall by $200,000 per annum. This would place the business, and Anthony, under significant financial pressure.
What can Anthony do to protect his business?
Anthony sees his financial adviser and together they calculate the level of protection that Anthony's business will need:
|Annual fall in net profit||$200,000|
|Cost to hire a replacement||$25,000|
|Cost to train a replacement||$25,000|
|Total insurance required||$250,000|
Anthony establishes an insurance policy over Gary's life for $250,000. The policy is owned by BluePrint.
If Gary dies or becomes permanently disabled, the insurance proceeds can be used to replace the fall in net profit of $200,000 over the next 12 months, and cover the cost of finding and training a replacement for Gary.
In the event of a claim, the insurance benefit can help put Anthony's business in a position to survive the loss of one of its most valuable employees, with minimal disruption to its cash flow.
1. For illustrative purposes only. The above case study demonstrates how BT Protection Plans may be able to aid you in times of need. Your financial planner will be able to assist you in determining the appropriate cover for your business.
Westpac and BT - helping you through your financial life
As part of our Group and one of Australia's leading wealth experts, BT has been helping Australians build and protect their wealth since 1969. With 50 years' experience BT can help you plan for today and tomorrow by helping to identify ways to make more of what you have and empowering you to make smarter, confident financial decisions. As a Westpac customer you have access to a range of financial products and services across superannuation, investments and insurance.
Things you should know
Information provided is for new applicants only. Existing customers should refer to their Policy Schedule for Terms and Conditions relating to their individual policy.
The Insurer of BT Protection Plans is Westpac Life Insurance Services Limited ABN 31 003 149 157, AFSL Number 233728 ('the Insurer').
BT Protection Plans is issued by the Insurer except for Term Life as Superannuation and Income Protection as Superannuation which are issued by BT Funds Management Limited ABN 63 002 916 458, AFSL Number 233724 ('BTFM') as trustee of the Retirement Wrap ABN 39 827 542 991. Westpac Life is a subsidiary of Westpac Banking Corporation (Bank). Neither the Bank, nor any member of the Westpac Group (other than the Insurer) guarantees the benefits payable in relation to BT Protection Plans.