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Thursday, 7 July 2016

For Owners and Partners of SME's: Keyperson Insurance

Are you an Owner or a Partner in an SME? If you are, then it is likely that you have inadequate business protection in place. Swiss Re estimates Asia’s “protection gap” to have increased to US$58 trillion in 2014 from US$42 trillion in 2010. Based on current trends, AIA estimates that this gap will grow to US$82 trillion by 2020, of which US$763 billion will relate to Hong Kong.


Credit: Active Life Advise

We have created a three part series for important elements of business protection you need to consider: Keyperson Insurance, Shareholder/Partner Protection and Loan Insurance.

Here is an overview of Keyperson Insurance:

What is it and why is it needed?
Key person insurance is one of the most overlooked types of insurance in Hong Kong, despite the fact that its’ absence could have a potentially catastrophic impact on a business.

Businessdictionary.com defines a keyperson as “an individual whose knowledge, creativity, inspiration reputation and/or skills are critical to the visibility or growth of an organization, and whose loss may cripple it.”

The unexpected loss of such an individual through death or incapacity could have myriad adverse consequences, including but not limited to, a delay in or even loss of major projects, a loss of confidence in the business, withdrawal of credit facilities and a loss of competitive edge. Cash flow will be severely impacted by these which, accompanied by unbudgeted replacement costs for the Keyperson could ultimately lead to the company going out of business as a result of a lack of simple and cost-effective planning.

What is the solution?
Keyperson Insurance can be structured to cover a variety of scenarios from the loss of profit associated with the absence of an individual all the way up to covering the costs of an orderly solvent liquidation if the business cannot carry on without the individual. The “art” of calculating the cover is taking the company’s financial records and computing the true costs of the particular event. This often requires an accountant's view so as to ensure all relevant factors are taken into account and is not simply a matter of plucking a figure from the air.

Further Considerations
The cost of cover varies with age, but US$1,000,000 of cover on standard terms for a 35 year old is US$ 96.12 per month, for a 45 year old US$192.78 and for a 55 year old US$ 524.41. There is therefore no excuse not to put this vital cover in place!


Neil Stokes, a partner at Just Service, is a UK Chartered Accountant. He was for many years a partner in medium-sized Accountancy Practices dealing with these issues on a regular basis. If you feel you need more advice on the subject please contact us and he will be happy to assist in any way he can.



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Just Service Hong Kong is a member of the Hong Kong Confederation of Insurance Brokers in Hong Kong, transacting Long Term (including linked long term) Insurance business. Nothing in the comments above should be taken as offering investment advice or making an offer of any kind with regard to financial products or services of any kind. It is therefore important to reinforce that all comments above are designed to be general in nature and should not be relied upon for considering investment decisions without talking to licensed advisers.

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