Keyman Insurance is a life insurance policy taken out by a business on the life of a key employee. It provides financial protection to the business if the key person dies, becomes disabled, or is diagnosed with a critical illness. The policy helps the company manage financial losses and ensure business continuity in such events.

Key person insurance protects businesses against the loss of profits if an employee becomes terminally or critically ill or dies. The money can be used to find a replacement for that key person, which can help keep the business trading.

‘Key Man Insurance’ means the same thing as ‘Key Person Insurance’ and refers to insurance policies that protect businesses from the loss of key individuals—men and women. We believe that gender does not play a part in the key individual running of a business.

It’s never nice to think about such situations. However, the sad reality is that losing a key person in your business could have a severe financial impact. With a crucial team member absent, whether death occurs or a critical illness, any business could suffer badly, with sales and profits falling and even increased workloads for the remaining staff as they will need to pick up the jobs of that key individual for such a time.

A key person could be anyone crucial to your business’s day-to-day running, such as a director, employee, or anyone whose skill, knowledge and experience can affect your bottom line. Or, to put it another way, what responsibilities might a key person have? Consider if any loans or financial commitments depend on that person, whether their loss would impact sales, or whether their absence would impact future planning.

Key people keep the business cogs turning; we can all have that high performer, skilful individual who took you months to find or even that manager who creates the company culture. 

A payout from the policy after the loss of a key person could help with the following situations:

• Loss of revenue/or profits
• Taking the time to replace that key person
• Replace the referrals that the individual was bringing to the business
• Customers and suppliers are losing confidence in the business due to losing that key individual
• Outstanding loans/debt

Key Person Insurance is critical to small or new companies. These companies usually consist of 1-10 people, meaning each person in that business has a crucial role in keeping it running. Key members could be the difference between failure and success.

Take a look around your business now and think to yourself, “If the worst were to happen tomorrow and I was to lose this person or that person,” what would you do? How would your business survive? How would you recover if such a loss occurred? These are the types of questions that will show you when Key Person Insurance is needed for you and your business.

Our team of experts at Protex Financial recommends that you start looking for Key Person Insurance as soon as you can identify the key individuals who keep your business cogs turning. 

There are several types of Keyman Insurance, including:

• Keyman Life Insurance: Provides a death benefit if the key person dies.
• Keyman Disability Insurance: Provides benefits if the key person becomes disabled.
• Keyman Critical Illness Insurance: Provides a lump sum if the key person is diagnosed with a critical illness.
• Revenue Protection Insurance: Compensates for lost income due to the key person’s absence.
• Loan Protection Insurance: Pays off business loans or debts.
• Succession Planning Insurance: Funds the recruitment and training of a successor.
• Business Continuity Insurance: Covers costs of business disruption.

The coverage amount is typically based on factors such as the key person’s salary, contribution to the company’s profits, replacement cost, and any outstanding business loans or financial obligations they are responsible for. A financial advisor or insurance provider can help determine an appropriate coverage amount.

Keyman Insurance provides several benefits, including:

• Financial Protection: Mitigates financial losses due to the death or disability of a key person.
• Business Continuity: Ensures the business can continue operating smoothly.
• Loan Security: Protects against defaulting on business loans.
• Succession Planning: Funds the process of finding and training a replacement.
• Employee Retention: Enhances employee benefits, helping retain valuable staff.

Whether premiums are tax-deductible depends on the jurisdiction and specific circumstances. In some cases, premiums may be considered a business expense and thus tax-deductible. However, if the policy benefits the business directly, the premiums might not be deductible. It’s essential to consult with a tax advisor or accountant for specific guidance.

If the key person leaves the company, the business can transfer or cancel the policy to another key employee. Some policies may allow the key person to take over the policy personally. The options available will depend on the terms of the insurance policy and the insurer’s rules.

A business can take out separate Keyman Insurance policies for multiple key persons. Each policy can be tailored to cover the specific risks associated with each individual. This approach ensures that the company is protected against the loss of any critical employees.

The duration of Keyman Insurance coverage can vary. Term life policies cover a specific period, such as 10, 20, or 30 years. Whole-life policies offer lifetime coverage. The policy term should align with the anticipated duration of the key person’s value to the business and any financial obligations the company needs to cover.

Refund policies vary by insurer. Some insurers may offer a partial refund if the policy is cancelled within a certain period, while others may not provide any refund. The specific terms and conditions of the policy will outline the refund policy.