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Succession planning: How key person insurance supports transition

Could your business continue if one of your most important people suddenly dropped out of the team due to illness or injury? Family businesses may have informal role structures but whatever your style you need to have a succession plan in place – and the insurance cover that supports it. Are you prepared for the unexpected when it comes to the loss of a key person?

17 August, 2023
Partners, Succession Planning, Article, Insurance
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Running a business comes with its fair share of risks, and one of the most critical is people risk. In a family business, owners and other people with unique skills, knowledge or leadership qualities are vital to success and stability, and their loss can have serious financial implications.

That’s why succession planning is an important aspect of your business’s contingency strategising. Discussing roles and obligations is critical – otherwise the loss of a key person can be not only emotionally devastating but have a serious impact on your continued revenue and profitability. 

Having key person insurance is an essential component in a business succession plan because it safeguards a range of individuals and different circumstances by providing for the expenses involved when someone you rely on drops out of the team.

You may have to make changes to personnel to cover interim arrangements such as contracting in a knowledge expert or outsourcing some aspects of operations. Financially the business may have to deal with transactions involving shareholdings, such as the need to buy a partner out.

Consider how the following scenarios might affect your business:

  • Your top sales person is diagnosed with cancer
  • shareholder has a heart attack and dies
  • The CFO is disabled and unable to work.

Key person insurance can include:

  • Trauma insurance
  • Life insurance
  • Total and permanent disablement insurance.

Succession planning case study

Here’s how key person insurance might apply in practice.

Jones Manufacturing is a successful business with a strong reputation in the wider industry. John Jones is the company's founder and CEO. He's instrumental in leading the design and operations, and holds a majority shareholding in the business.

The challenges

When John suffers a stroke and dies unexpectedly his loss creates a dual challenge for Jones Manufacturing:

  • the financial impact of losing a key person
  • the disruption to the company's ownership structure.

Revenue protection

Fortunately, the business had the foresight to take out a key person insurance policy on John. When John dies, this policy pays a capital benefit to the business to offset loss of profits and fund the recruitment and training of a new technical specialist. The funds also allow the company to invest in additional training for existing employees. This ensures that projects continue smoothly, safeguarding the company's reputation and providing financial stability.

Equity ownership protection

The business had also secured equity ownership protection. This insurance policy provides a payout that, in conjunction with a buy/sell agreement, allows the remaining shareholders in the business to purchase John's shares from his estate. The payout ensures a smooth transition of ownership, preserving the company's stability and avoiding potential conflicts with John's family, who inherited his equity.

The outcome

The key person policies prove invaluable by providing financial resources to navigate the loss of their key person and mitigate the impact on the business's equity and profitability.

How Gallagher can help

When it comes to looking after your enterprise, including key people, don’t hesitate to call on our expertise. Gallagher can advise on insurance tailored to your family business’s needs. Call 1800 240 432 to chat about your particular needs.

Roz Shaw

After a 30-year career in running her family’s transport business Gallagher Account Manager, Family Business and Transport, Roz Shaw moved into an equally high-level role in insurance, drawing on her industry experience and knowledge of family business dynamics.

To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.