Keyman Insurance

 

Last week, on 8th Feb 2024, I had a luncheon meeting with an old friend. Our firm had assisted him in incorporating his company 10 years ago, and we have been managing their Accounts, Audit, and Taxation since then. The meeting focused on strategizing for the end of the Financial Year 2023-24.

In an earlier meeting, I remember suggesting the idea of obtaining key man insurance. We aimed to have this coverage for at least the directors, all of whom were actively involved in the company’s operations. During the course of our our discussion my friend informed me that they have successfully secured keyman insurance for the three promoter directors. They are now considering extending it to other key individuals within the organization within the next 2 years.

When I later shared this information in our office, a staff member expressed curiosity about what keyman insurance entailed. This prompted me to write an article on this crucial topic.

 

Keyman Insurance is a type of insurance that helps protect businesses from financial losses that may occur if a key person in the company passes away or becomes unable to work. This insurance is crucial for businesses that heavily rely on certain individuals for their success.

In simple terms, a key person is someone who plays a vital role in the functioning of a business. This could be the owner, a top executive, or someone with unique skills and knowledge that are essential to the company's operations. Keyman Insurance ensures that the business can continue to operate smoothly even if the key person is no longer available.

The basic idea behind Keyman Insurance is to provide financial support to the business in the event of a key person's death or incapacity. The insurance payout can be used to cover various expenses, such as hiring and training a replacement, paying off debts, or compensating for the loss of profits that may result from the absence of the key person.

Let's break down the concept of Keyman Insurance into simpler terms.

Why is Keyman Insurance Important?

Imagine a small company that heavily relies on its founder, who is not only the owner but also the driving force behind the business. If something were to happen to this key person, it could have a severe impact on the company's ability to operate and generate income.

Keyman Insurance steps in to provide financial assistance when such a situation arises. It ensures that the business has the necessary funds to navigate through the challenges that come with the loss of a key individual.

 

Who Can be a Key Person?

A key person can be anyone whose absence would significantly affect the business. This could include:

1.     Business Owners: Especially in small businesses, the owner is often the key person who is crucial for decision-making and overall operations.

2.     Top Executives: CEOs, CFOs, and other top executives who are instrumental in the company's success.

3.     Specialized Employees: Individuals with unique skills or knowledge that are not easily replaceable, such as a top salesperson or a lead engineer.

Identifying key persons is essential for determining the amount of insurance coverage needed.

How Does Keyman Insurance Work?

Here's a simple breakdown of how Keyman Insurance works:

1.     Business Takes Out a Policy: The business, as the policyholder, takes out an insurance policy on the life of the key person.

2.     Paying Premiums: The business pays regular premiums to keep the policy active.

3.     Insurance Payout: If the key person dies or becomes unable to work, the insurance company based on the keyman insurance policy  pays out a lump sum to the business.

4.     Using the Payout: The business can use the insurance payout to cover various expenses, ensuring the continuity of operations.

 

Benefits of Keyman Insurance:

1.     Continuity of Operations: With the financial support from the insurance payout, the business can continue to operate smoothly during a challenging time.

2.     Hiring and Training: The funds can be used to hire and train a replacement for the key person.

3.     Debt Repayment: If the business has outstanding debts, the insurance payout can be used to settle them.

4.     Loss of Profits: Compensation for the potential loss of profits that may result from the absence of the key person.

Considerations When Getting Keyman Insurance:

1.     Identifying Key Persons: Clearly identify who the key persons are in your business. This is crucial for determining the coverage needed.

2.     Choosing the Right Coverage: Work with an insurance advisor to determine the appropriate coverage amount based on the financial impact the loss of a key person would have on the business.

3.     Premium Payments: Ensure that the business can consistently make premium payments to keep the policy active.

4.     Reviewing and Updating: Regularly review and update the policy to reflect any changes in the business, such as the addition of new key persons or changes in the financial needs of the company.

To conclude, Keyman Insurance acts as a financial safety net for businesses, protecting them from the potential financial hardships that may arise from the loss of a key person. It ensures that the business can continue its operations and navigate through challenges, providing stability and peace of mind for business owners. Identifying key persons, choosing the right coverage, and regular policy reviews are essential steps in making the most of this insurance strategy.

The content made available in this article is for general informational purposes only. While every effort has been made to ensure the accuracy and completeness of the content, it should not be considered as a substitute for professional consultation. 

About the Author