The real cost of losing a key person in your business

Most business owners have thought about what would happen if they lost a major client. Fewer have seriously considered what happens if they lose a key person. 

The financial impact of losing a critical team member — whether through serious illness, injury, or death — is often far greater than business owners expect. And unlike a client loss, it can hit everything at once: revenue, morale, operations, and reputation. 

Here's a realistic look at what's at stake, and what you can do to help protect your business. 

The cost of replacement alone is significant 

Recruitment in New Zealand isn't cheap or fast. For senior or specialist roles, you can expect to spend: 

• $15,000–$40,000+ in recruitment fees (agency fees typically run 15–20% of first-year salary) 
• 4–12 weeks to fill the role, longer for specialist positions 
• 3–6 months for a new hire to reach full productivity 

During this gap, someone else in the business is covering the absent person's responsibilities — which means other work suffers, or you're paying contractors at a premium to fill the void. 

Revenue disruption is often immediate 

If the key person was directly responsible for generating revenue — a top salesperson, a client-facing director, a specialist tradesperson — the financial impact begins the day they're gone. 

Consider: 

• Sales pipelines that stall or collapse without the person managing them 
• Client relationships tied to a specific individual
• Projects delayed or cancelled because a specialist skill is no longer available 

For many New Zealand SMEs, a single key person may be responsible for 30–50% of total revenue. Losing that person — even temporarily — can create a cash flow crisis.

Operational disruption compounds quickly

Key people rarely just do one thing. They often carry institutional knowledge, supplier relationships, staff management responsibilities, and client commitments that aren't formally documented anywhere. 

When they're gone, the gaps become visible fast: 

• Team performance drops without their leadership or oversight 
• Suppliers become uncertain about continuity and may change terms 
• Clients ask questions you can't always answer confidently 
• Internal processes that only the key person fully understood start to break down 

The psychological cost to the remaining team

Business continuity isn't just financial. When a key person is absent — especially due to illness or death — it can affect the confidence, morale, and retention of the rest of the team. 

Staff who were close to the absent person may become disengaged or start considering their own position. Uncertainty at the top tends to cascade downward. 

How long does recovery take?

Research into business disruption consistently shows that recovery from an unplanned key person loss takes longer than businesses expect. Even with a strong team, rebuilding the knowledge, relationships, and revenue that one critical person carried can take one to three years. 

For smaller businesses, recovery may not happen at all. According to industry data, a significant proportion of small businesses that experience an unplanned loss of a key person do not survive past the following 12 months. 

The role of key person insurance

Key person insurance doesn't prevent the loss — but it does give your business the financial breathing room to respond to it. 

A monthly payout can cover revenue shortfalls and contractor costs while you find a solution. A lump sum payout can fund a proper recruitment process, provide a financial buffer, and signal stability to clients and lenders. 

Think of it as your business's emergency fund for its most valuable asset: its people. 

What businesses are most at risk?

While any business can be affected, the risk is highest when: 

• One person holds the majority of client relationships 
• Specialist knowledge isn't documented or shared across the team 
• The business has outstanding loans or financial obligations tied to key person performance 
• The team is small and there's no direct backup for critical roles

Ask yourself this

If your most important person couldn't work for the next six months, what would that cost you — in revenue, recruitment, and recovery? If the number is significant, it's worth having a conversation about key person insurance.

Taking action

The first step is identifying who your key people are and estimating the financial exposure their absence would create. From there, a specialist broker can help you structure cover that's proportionate to the risk.

Marsh has been helping New Zealand businesses manage risk for over 60 years. If you'd like to understand your options, our team is happy to have that conversation.

LCPA 26/NZ133