Insurance strategies for small business owners

Key person income insurance can be an integral part of an overall risk strategy for advisers' small business clients.

It’s often said that, for small businesses, cash flow is king.

To give a business the best chance of survival over the long term – and of succeeding – the business owner needs to be smart about mitigating risks.

A small business faces a myriad of risks that impact on their cash flow – these can relate to the economy, competition, or changing consumer behaviour, and they can be hard to control.

One type of risk they can have a degree of control over is ‘people risk’ – that is, the financial impact to their business if a key person dies or becomes sick or injured.

A key person is someone who is critical to the financial wellbeing of your business through their continued association. Key people can play an important part in generating the revenue for the business.


The most likely impact to a business is a key person suffering a temporary rather than a permanent disability. This could be from any cause, including a physical injury, cancer or a minor heart attack. Suffering a disability and being unable to return to work temporarily is far more common than suffering a permanent disability that prevents you from working again.

The absence of a key person due to temporary disability can place a business under the same significant stress that occurs in the event of the key person’s death or permanent disablement. In addition, there is uncertainty as to when (or if) the key person will return, which makes it difficult for the business to make decisions about whether to hire and train a replacement, how to handle certain client relationships, and general business planning.

Having an income stream to replace revenue after the loss of a key person and in the months that follow could mean the difference between survival and business failure.

Traditionally, cover for a small business has been limited to lump sum cover, but key person income insurance is designed to provide a monthly benefit to cover the revenue generated by one or more key people within the business should they become ill or injured.

Key person income insurance provides a monthly benefit for up to 12 months to help cover lost revenue of the business in the event that the key person is unable to work due to sickness or injury. This means it covers most disability circumstances, rather than just those that are total and permanent (and covered by total and permanent disability cover) or those which are listed as specified events (and covered by trauma insurance).

Ask your clients to think about the people associated with their business whom they would consider to be key people. For each person, what would be the impact on their business if that person was off work for 6-12 months?

They should consider how their business will continue to pay its expenses and maintain cash flow if this were to happen. There are a number of potential methods that a business might consider, including using existing cash reserves, drawing down from existing loan facilities and selling some of the business’ assets.

However, for many businesses, these options may not be possible. In the meantime, their business revenue could fall significantly.

Key person income can be an integral part of an overall risk strategy for small business clients. Your client can be insured for a monthly benefit of up to $60,000 (protecting an annual gross profit produced by that individual of $720,000), giving them another option for mitigating cash flow risks.


Katherine Ashby is a senior product technical manager, life insurance, with BT

Ms Ashby has also written the following article for Risk Adviser:

Talking risk when you're not an expert


Insurance strategies for small business owners
Katherine Ashby
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