Have You Insured Your Key Person?

Key Person Insurance is critical to ensure the survival of your business. Have you insured the key person of your company?

Have You Insured Your Key Person?

26 Oct 2015 by  Nicholas Brinton

Every office, shop or factory you enter in Singapore will display the general liability insurance certificates that the employers have taken out. 

However have you covered the most valuable business asset of your company?

This crucial asset is the key person of the company, who holds the knowledge and skills essential to the life of the company.

Two CEOs passed away in 2015- Satoru Iwata (Nintendo CEO) and Dave Goldberg (Surveymonkey CEO).   On an average, seven CEOs of public listed companies passed away while in office every year from 1997 to 2000 in the US, of which 75% were sudden deaths, according to a study done by Stanford Business School.

Are you aware of the impact of untimely death of a key person of a company?

Key person infographic
1. ‘Sudden deaths of CEO’ - Stanford Business School, 3 June 2012
2. ‘Many firms do not survive after death of owner’ – Forbes, 26 Feb 2013

A 2014 study found that the passing away of a key person in the SME sector resulted in a 60% drop in sales in the 4 years following the death. In fact, the very survival of the business is at risk.  Those companies that have lost a CEO have a 20% higher chance of filing for bankruptcy.

What is Key Person Insurance?

Key Person Insurance is a life assurance policy owned by the company to cover the life of its key person. In the case of the unfortunate death of a company’s key employee, the insurance company pays back a pre-determined sum to the company. The company’s board decides how these funds are paid out. In most cases, the funds are used for the recruitment and training of a replacement, but can also be used for repayment of a bank loan, increase in working capital or even a gratuity payment to the key person’s surviving family. 

Ironically it's the smaller companies with the highest risk that are the most underinsured.  Medium to larger companies tend to be insured as they have access to bank consultants and Key Person Insurance is often mandatory as part of any IPO or shareholding. 

Increase in life expectancy and improvements in medical treatment bring down the cost of Key Person insurance. The table below illustrates some costs. Premiums are annual costs in SGD.  

Amount of Death benefit  Premiums (Age 45) Premiums (Age 55)
$1,000,000 $1,155 $2,924
$2,500,000 $2,889 $7,310

In Singapore, as long as certain parameters are met, the contribution to a Key Person insurance scheme can be a business expense and tax deductable.

Key Person Insurance is crucial to plan for the unexpected death of a key employee. It’s also critical to ensure the survival of the business.

Lastly, it helps an employer demonstrate their risk management and succession planning policy to investors, employees and clients.

Start a conversation with us

If you want help to manage risks around your key personnel, get in touch with us today.

Nicholas Brinton

Nicholas is a Senior Client Adviser with Aon Hewitt Wealth Management. He specialises in consulting on Financial Wellness and Retirement solutions for organisations, their employees and providing financial advice to individual executives. He has been living in Singapore for the past 5 years. Prior to this, Nicholas was a Senior Private Banker in the UK.

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