Keyman Insurance (Key Person Insurance) is a life insurance policy on a key person or key employee in the business. These policies are structured in a particular way to protect a business should the unforeseen occur to that key person.
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Types of Keyman or Key Person Policies
There are 3 ways a key person insurance policy can be used to protect a business. These are: buy sell insurance, capital protection or revenue protection.
Buy Sell Policies or Buy Sell Insurance Cover:
This is used to cover the shares in a business or partnership. These policies are used to fund the buying out of the shareholder or partner should they pass away, become disabled or suffer a traumatic event. This ensures that the other partners or shareholder have the funds to pay for their share of the business at this time.
This type of keyman policy is structured to provide cover on the key persons who are the guarantors on any business loans or credit facilities. This ensures that should the key person pass away the remaining shareholders or partners, or even the estate, have the funds to pay back any outstanding business loans.
This type of policy structure protects a key person; employee or director who is a cornerstone member of the businesses in generating revenue; intellectual property; or expertise to the business. This type of cover provides compensation so that a suitable replacement can be found without the revenue of the business being compensated.
Who should have a key person insurance policy?
Key person insurance is really important to every business in Australia who has any of the following:
- Business loans / Debt or credit facilities.
- Businesses that rely heavily on one or two key staff / Directors who are fundamental in the survival of the business.
- Sole Traders / Partnerships or Companies with substantial business valuations.
In the event that a key person in the organisation suffers death or disablement and you would like your business to continue unscathed, then you really need to consider obtaining a keyman policy to protect the business.
How much cover is required for a Key Person?
When it comes to key person insurance there is no one size fits all. It all depends on a number of factors including the following:
- the purpose of the cover
- the amount of funds that would be required to ensure that the key person’s passing does not leave the business in a worse financial situation
- any taxation consequences based on the particular structure you set up.
Considering Keyman or Key Person Cover
Each business or company is different so it is therefore essential that you set up a keyman insurance policy for the benefit of your business.
If you are unsure about Key Person insurance or would like information on Life Insurance, please contact one of our advisers on 1300 135 205.Published: September 4, 2012