Most businesses insure their offices, computers, cars, etc, but usually fail to recognise their most important asset - the key people. Thus key person insurance is the most neglected business insurance option in Australia.
Only 25% of business owners could maintain their lifestyle for more than 6 months if they suffered a serious illness or injury. (IFSA Research in Nov 2006)
In general it can be described as an insurance policy taken out by a business to compensate that business for financial loss that would arise from the death or extended incapacity of the member of the business specified on the policy.
The aim is to compensate the business for losses and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.
For smaller businesses with partners, it is designed to protect each partner. If a partner of a firm dies, usually the other partner or partners need to purchase the shares of the business from the deceased's family. Having insurance permits this to be easily facilitated with correct buy - sell agreements in place.
There are four categories of loss for which key person insurance can provide compensation:
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