How smart business owners manage key staff losses

Losing an essential staff member to death or injury is harrowing for all, and it can sink a smaller business – especially if it’s your top salesperson, a specialist with hard-to-come-by skills, or the business founder and owner.

Out of the average of forty eight per cent of all businesses that fail within the first five years, according to Statistics New Zealand, how many bankruptcies and closures can be attributed to the loss of one of its most valuable assets, its talent?

Key person insurance can help minimise the risk of relying too much on key employees. For a monthly premium, businesses can insure themselves against the loss of income as a result of the unfortunate death, trauma or permanent injury of its staff members, as well as the unplanned additional costs associated with attracting replacement talent.

These expenses would include the services of a recruitment agent to find replacement candidates, hiring a contract employee to stand-in, finder fees, and potentially cash incentives to get a preferred employee to sign on the dotted line.

Often this is no small beer. According to the Human Resources Institute of New Zealand (HRINZ), the total cost of replacing an employee who has worked for the company for a minimum of 12 months is generally three times their salary.

“One of the most common mistakes SMEs make is to overestimate their cash flow and underestimate the devastating impact talent loss makes to the bottom line,” says Lifetime financial adviser Kelvin McKissock.

“Given this, it makes sense for business owners to put aside a nominal fee monthly or annually, into an insurance plan to protect the profitability and long-term success of the company.

“A key person insurance pay-out gives you interest-free cashflow when you need it the most and helps the company keep buoyant.”

Working in the same manner that personal life insurance does, business owners can take out a policy against the livelihood or profit associated with a staff member. This is through using levers such as excess, waiting periods, and insured amounts to manage policy costs.

With 33 years across the insurance, financial and banking industries, Lifetime’s Kelvin McKissock suggests seven sure-fire ways to minimise costs when taking out key person insurance.

1. Avoid insuring non-essential personnel

Focus on employees who are hard to replace or who carry critical knowledge you can’t create succession planning processes around.

Start by looking at the specialists within your business or anyone directly linked to business profitability as pay-outs are determined by the actual income the key person is responsible for bringing in.

2. Review multiple product options before signing

Don’t make the mistake of opting for the first policy you find, rather use a trusted adviser who deals with more than one company’s products.

One of the key benefits of using a broker is that they can do all the hard work and present you with a range of products to compare. A good broker knows the right questions to ask on your behalf, evaluate your business needs, and make sure you’re getting value for money – and often does so at no cost to you.

3. Don’t overlook trauma cover

The trauma cover option within key person insurance is often overlooked – but it makes business sense to cover your overall risk. Research shows four out of 10 males and six out of 10 females are likely to be off work for a period of 30-90 days due to an illness or accident before they reach 65, trauma cover gives businesses a lump sum to spend as they see fit.

4. Extend your waiting period to save on premiums

You can save up to 50 per cent of your monthly premium by increasing the duration of your pay-out waiting period – but only do so if your business can carry itself on existing cashflow. The standard waiting period is four weeks, while the longest advisable waiting period is 90 days.

5. Keep your personnel healthy

It pays businesses to assist in keeping their employees healthy, particularly as the lifestyle habits and general health of insured staff member affects premium costs. Creating a healthy workplace environment can go a long way to positively affect your staff’s lives as well as your bottom line – and has been proven to promote staff retention.

6. Insure with your family in mind

We’re seeing business owners add key performance insurance to their existing personal cover. It all comes back to families being protected. Business owners need to consider the impact their inability to work could have on family members left to continue without that income.

Insuring the business owner for additional personal trauma and life cover, and income protection, as well as key person coverage, makes sense for the most comprehensive protection.

7. Premiums are tax deductible

Because key person cover is a business expense not a personal one, it can be considered part of a company’s running costs. This makes the option a further ‘no-brainer’ as it offers considerable peace of mind while ensuring business continuity.

Key person insurance goes a long way to ensure business continuity should the worst occur. It makes financial sense for SMEs to invest in their profitability and lower their operational risk, and it’s vital for companies to use trusted brokers to navigate product detail so that they choose a policy best suited to their needs.

Article By Kelvin McKissock