When disaster strikes a business, key man insurance is one way to keep the curtain up

by Sunanda K. Chavan on Monday 24 January 2011, 3:07 PM | Category: Human Resources| View: 3188 views


When disaster strikes a business, key man insurance is one way to keep the curtain up

A key person is someone who makes a significant contribution towards the profitability of the business and whose loss will inevitably cause financial ruin to the business. Keyman insurance is new type of insurance in place and hence a legal definition of the same is not in place. Sometimes Keyman Insurance is also called Key person insurance or key executive insurance. The objective of Keyman insurance is to minimize the negative impact of death disability or trauma of a key person, thus keeping the business running & assure creditors in similar position, such policies cover the expenses of finding and replacing the key person. "Key Man" insurance is a life and/or disability policy taken out by the business as a beneficiary in the event of death or disability to a particular key employee. This type of policy is also called: key executive coverage, key person coverage and key employee coverage. The policy works by paying the business in the event of the death or disability of a person who is so important to the business that their loss could destroy the business. The policy is a cheaper option than standard life or disability policies because the policy can be purchased with a "first to die" provision and cover multiple key employees. Sometimes Keyman insurance may be just as crucial to niche category business.

Reasons for buying Keyman Insurance

You are engaged in professional business and the key employees cannot be replaced due to legal constraints

The business cannot operate in the absence of particular people in business.

When you know that without it the business cannot run.

When you know without the Keyman future finance will be a great problem.

When you know that the key person in your organization is aged and hence it is necessary.

In India it is Keyman insurance, but in Australia the same thing can be known as

*TPD insurance;

*Trauma insurance; and

*Income protection insurance.

However the benefits of Keyman Insurance to the company are as follows

The risk of financial loss is leveraged

Premium paid under such insurance is allowed as business expenses

Interest on loans taken against a keyman insurance policy may also be allowed as business expenses.

Premiums paid by the company on the life of a keyman would not be treated as perquisites in the hands of such a keyman when the company's request is accepted by the assessing authority.

Keyman Insurance policy is a positive measure to improve the retention of the key man in the company.


But the merits aren't the only thing that can motivate businessmen to go for keyman insurance there are certain things that need to be analyzed like

Keyman's qualification

Experience in different fields

Previous records and service period in the company

Does the company possess more than one key man

There are four categories of loss for which key person insurance can provide compensation:

Losses related to the extended period when a key person is unable to work, to provide temporary personnel and, if necessary to finance the recruitment and training of a replacement.

Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialised skills or knowledge.

Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners.

Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.

 One of the biggest advantages that you can get from this type of insurance is business security. By providing cover for you company, big financial setbacks and loss of profits can be avoided. This insurance also enhances the confidence of your investors which is generally beneficial for the long term viability of the business.

While nothing can mitigate the pain of the loss of a colleague, companies can provide for the ?nancial repercussions caused by the event as part of their business continuity planning

Before taking out the Keyman insurance:  

Don't assume only your CEO is the “key man “Consider also your senior designers, engineers and sales managers without whom you can't operate.

Calculate the impact of your potential losses

Look at the replacement costs for your key men and any contractual payouts due to their survivors, as well as their current or future contribution.

Identify and mitigate the risk

Identify the risks that could seriously damage or put you out of business.

Plan ahead and look at ways of enabling other staff members to cover for a key person if disaster strikes.

Look at the implications for ownership

CPAs can help calculate the cost for a buyout if you need to purchase shares from the original stakeholder or their estate.

Protect your pro?ts

The effect of losing key staff will hit the bottom line. You can insure for loss of pro?ts too.

Read the ?ne print

It's important to know what the policy covers and what it excludes.

The type of business you are in will affect the policy. Check if you need cover for certain travel destinations and potentially physically-dangerous business operations.

Regularly review your business risks

If you can show your insurer that you have business continuity systems and management procedures in place, this could reduce the cost of your policy.





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