Risk & Business Magazine Cal Legrow Spring 2017 | Page 31

KEY PERSON INSURANCE
BY: KIRK STOYLES, CLU, DIRECTOR,
CAL LEGROW FINANCIAL
Why Key Person Insurance Matters
What You Need To Know
K
ey Person Insurance can be
described as an insurance
policy taken out by a business
to compensate that business
for financial losses that
may arise from the death or extended
incapacity of an important member of
the business. This insurance protection
involves the use of life insurance and/
or critical illness protection to create
immediate working capital for a
business to meet its immediate cash
needs and find a replacement in the
event of the loss of a business owner or
key executive due to death or serious
illness. When considering the need for
Key Person Insurance, consider some of
the questions below to determine what
your business might look like should a
key member of your team die or become
incapacitated due to accident or illness.
WILL THE LOSS OF THE KEY PERSON
AFFECT CASH FLOW?
• To what extent do you feel
the loss of the key person will
affect sales or production?
•
How long do you expect
this disruption to last?
Losing a key person with special
skills, experience, reputation, or
relationships with customers will
likely disrupt business operations.
These disruptions could affect
sales, production, or customer
service, and as a consequence
affecting revenue and cash flow.
HOW WILL THE BUSINESS CREDIT BE
AFFECTED?
• Will the loss of a key person
affect your company’s
ability to secure credit?
• Will suppliers alter credit terms if
your company loses a key person?
• Is there any specific debt or bank
loan that should be repaid upon
the death of a key person?
It is safe to assume that if cash flow
is affected by the loss of a key person,
the business’s credit is also likely
going to be affected. Uncertainty
or loss of confidence by lenders or
suppliers may cause them to restrict
credit or demand cash payments.
ARE THERE GOING TO BE TRAINING
AND RECRUITING COSTS?
• What is the cost of finding, attracting,
hiring, and training a replacement?
• Is a temporary replacement needed
during the interim period?
• How will other employees be affected
by the loss of the key person?
Finding an immediate replacement
with the same qualifications as a
deceased owner or key person is
seldom possible in small business
situations. In fact, it is often
necessary to look outside of the
business to find a replacement,
causing delays, disruption, and
reduced efficiency.
Answering these questions will not only
help you determine your level of risk, it
will also help you decide if Key Person
Insurance is a fit for your company.
Whether you own a small, medium, or
large business, Key Person Risk should
be assessed. I would be happy to review
your current situation and help you
determine ways you can mitigate your
risk in the event of the death or incapacity
of a key member of your team. +
Kirk Stoyles is a Partner and Director at
Cal LeGrow Financial, who graduated
with a business degree from Memorial
University of Newf