Securing Stability: Why Key Person Coverage Is Critical For Business Continuity
Rakesh Jhunjhunwala, an Indian billionaire investor, stock trader and Chartered Accountant, passed away at the age of 62. He had invested in multiple businesses, including sewing machine maker Singer India, in which he held a 6.95 per cent stake (worth Rs 37.06 Crore) when he died suddenly after a brief illness on 14 August 2022. Ambareesh Murthy, the CEO of Pepperfry, passed away on 7 August 2023 while attending a business offsite. He had a total shareholding of Rs 51.54 crore in Pepperfry. These are examples of the sudden demise of senior-level executives whose services substantially contribute to the success of a business. Such sudden demises of key persons within a company can lead to significant losses.
BW Businessworld spoke with insurance companies to find a solution to manage monetary risks related to senior-level employees. Shriram Life Insurance MD and CEO, Casparus Kromhout, said, "To protect businesses from such risks, most corporate firms opt for keyman insurance to mitigate potential losses." He added that Key Person Insurance (or Keyman Insurance) serves as a proactive risk management tool, mitigating the financial repercussions in the business associated with the loss of a critical individual.
The experts highlighted that by providing a financial safety net, this insurance product safeguards businesses against loss due to potential revenue decline, recruitment costs, and missed opportunities arising from such an event.
This targeted solution proves particularly valuable for small and medium-sized businesses or family-run businesses heavily reliant on the expertise and leadership of a few individuals. Bikash Choudhary, Chief Actuarial & Governance Officer, IndiaFirst Life Insurance, said "This insurance serves as a proactive risk management tool, mitigating the financial repercussions in the business associated with the loss of a critical individual. By providing a financial safety net, this insurance product safeguards businesses against loss due to potential revenue decline, recruitment costs, and missed opportunities arising from such an event. This targeted solution proves particularly valuable for small and medium-sized businesses or family-run businesses heavily reliant on the expertise and leadership of a few individuals. By mitigating these financial risks, Key Person Insurance empowers organizations to navigate challenging transitions and foster long-term resilience.
Choudhary added that the employer serves as both the proposer and premium payer under Key Person insurance, with life insurance coverage provided to the identified Key Person. In the event of a claim, the sum assured goes to the employer.
Importance
Organisations reliant on key individuals face magnified risks due to any unfortunate demise, illness, or disability of key persons. The very survival of such organisations can be inextricably linked to a key figure's presence.
The company receives financial support in terms of the claim sum assured in case of the insured event on the Keyman, which can be used to cope with the loss and ensure business continuity.
Key Person Insurance mitigates financial risks by providing support, ensuring resources are available to navigate the loss, and safeguarding long-term stability.
It promotes stability and continuity by providing a financial lifeline during challenging transitions. It cushions the blow of lost revenue, covers the costs of finding and training a replacement, and helps maintain operational stability. All these are essential when facing the unexpected loss of a key individual in an organisational setup. By providing a financial safety net, this insurance product safeguards businesses against loss due to potential revenue decline, recruitment costs, and missed opportunities arising from such an event. "This insurance contributes to the stability and continuity of a business by providing the requisite funds to cover financial losses, facilitate the transition period, and support ongoing operations during unforeseen circumstances or leadership changes. It aids in maintaining confidence among stakeholders," said Sajja Praveen Chowdary, Head of PB for Business.
Who They Are
While explaining who a company's key persons are, Chowdary added, "Individuals with specialized skills, whose absence could potentially impose financial challenges on the company, are eligible for Keyman Insurance. This category may encompass Company Directors, pivotal sales professionals, key project managers, and people with specific skills.
How To Opt
The employer takes out the keyman insurance policy on the life of the Keyman and is mostly in the form of a term plan. The employer buys the keyman insurance, and the benefits of the policy are paid to the employer. "Generally, small businesses need this protection as they often rely heavily on one or two key people. One more reason a company might require key man insurance would be to secure a business loan (often key man insurance is a requirement of approval). Also, in cases where there are a few business partners, funding might be needed to buy-out in the event of the death of a business partner; this also helps in smooth business succession planning in case of an emergency and fund investor expectations during these times," explained Kromhout.
