A basic but crucial part of smart business is risk management. The important and calculated approach to understanding, evaluating and tackling threats to a business’ future growth, earnings and success. Wise and experienced business leaders and consultants are quick to differentiate that, at its most effective best, risk management is a double-yoked egg fact of good management: risk assessment and risk mitigation.
Although it is detailed, complex and business-specific, the five essential steps of an effective risk management process are:
- Identify the Risk. Review operations, products, services, safety plans, compliance materials, human resource documentation and wellness programs for risks.
- Analyze the Risk.
- Evaluate or Rank the Risk.
- Treat the Risk.
- Monitor and Review the Risk.
- Finance Risks. Purchase insurance to fill in the unexpected voids or gaps.
Today’s holistic approach to risk management considers risks such as climate change, cyber and geopolitical developments. They also align risk management plans with the organization’s risk appetite and tolerance.
As savvy leaders and consults preach, the goal of any risk management program is to remove the word “accident” as much as possible from a business’s operations.
Taking a cavalier attitude toward risk management is like driving a vehicle down the road without knowing if the brakes are worn, the tires are balding or not wearing a seatbelt. The business experts say the best defense is a good offense. Managing and mitigating risks.
From business basics like access to confidential information to the intricate menace of cyber risks, risk management was traditionally whatever it took to hard core protect the company’s bottom line.
And then people – owners, CEOs, executives, senior management – were worked into the equation.
“The success of many businesses is driven by its people,” observes Mitchell Singer, director Taxation and Estate Planning with RBC Insurance. Risk management embraced the possibilities in the absence of those key individuals, could a business continue to thrive? Will it even survive?”
It is how key person insurance evolved. Insurance which a business buys on the life or health of an owner, an executive or an employee who is crucial to the company’s success.
“Key person insurance can help mitigate the risks of the loss or disablement of someone who is invaluable to a company’s operations by providing financial security,” he says. “If an insured employee or owner were to pass away or become disabled and unable to work, the benefits payable from a key person life or disability insurance policy could help the business with vital contingencies like recruiting, hiring and training a replacement, managing payments including paying-off debt or managing creditors, protecting a company’s financial health including easing a lender’s concerns about the company’s financial health, and importantly impact the business’ survival by reassuring customers, employees and investors that the business will continue and survive.
The insurance industry explains that there are three types of key person insurance. Life insurance with proceeds helping the business meet its financial objectives and pay for hiring and training a replacement. Critical illness insurance for a sudden illness covered by the policy pays a lump sum to the business, helps cover financial losses or lower productivity from ‘the key person’ being away from work. Disability insurance helps to provide ‘the key person’ with a salary until age 65 or until they recover, and helps pay office expenses and salaries during the time of the ‘the key person’s’ disability.
Singer points out that key person insurance can provide a business with the working capital it needs to keep operating and to fund the recruitment and training of a replacement, should a key person pass away or become totally disabled.
“Let’s face it. If the key person is the most significant contributor to the business, the company may not be able to continue operating without that person. Key person insurance mitigates that risk by compensating the business for unexpected costs and for lost income, in case the business must close.”
While key person insurance providers tend to be low-key about the concept, and without documented evidence or tracking, insurance experts allude to anecdotal likelihood that the sudden business broadsides inflicted by the pandemic sparked increased business interest in key person insurance.
As Mitchell Singer points out, while key person insurance is personal and about the individual. It is all about business, cash flow and the bottom line, mitigating the business risks caused by a key person’s incapacity.
And as with conventional insurance coverage, there are many options and choices. “For key person life insurance, there is a wide range of coverage amounts available, business owners can choose between term and permanent life insurance. And life insurance proceeds are tax-free. For key person disability insurance, a policy can be maintained until the insured turns 62 or leaves the company, and benefits can range from $2,500 to $15,000 per month for 12 months, and can start after either 60 or 90 days of total disability.”
One thing is for sure. Key person insurance adds a uniquely personal dimension to essential risk management. Because key employees are essential to the success of a business, their unexpected loss can have significant financial and operational consequences.
