Keyman Insurance

Key person Insurance (also known as Keyman Insurance) is a business owned life insurance policy which insures a key employee or person within a business.

Essentially it pays a lump sum benefit to the business if the insured key person passes away or is diagnosed with a critical illness or total and permanent disability and needs to exit the business.

These policies can potentially protect a business from losing thousands of dollars if you lose a key person in your business

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How does Keyman Insurance work?

A keyman policy works in the exact same way as a normal life, trauma or TPD policy only the business is the beneficiary of the cover and a key employee is the insured.

If that key person was to pass away, become totally and permanently disabled or suffer a critical illness and was required to leave the business, the lump sum benefit would go to the business.

It can help cover:

Loss of staff: You may be required to hire a temporary or permanent replacement for the exiting employee

Lost revenue: If the staff member was responsible for bringing in significant business or revenue, the lump sum payment can help offset this

Payment of business loans for which exiting employee was a guarantor

Funding of purchase of shares of exiting employee

Policy Types Available

Revenue Protection

This type of cover protects against lost revenue as a result of a key person exiting the business if that person brings in significant revenue, as well as covering the wages or salary for hiring a replacement or the costs of searching for a replacement.

Capital Protection

Ensure your business has the necessary funds to pay out any outstanding business loans with Capital Protection insurance should a key person who acts as a guarantor to any business loans pass away. You may also want to make sure you cover any overdraft facilities.

Buy/Sell Insurance

Buy/Sell Insurance ensures the remaining business partners or shareholders have the funds to buy out a deceased, disabled or critically ill key employee’s shares or ownership interests should they need to exit the business.

Cover Types Available

Life Cover

Total and Permanent Disability


Who should have a keyman insurance policy?

You may want to consider cover if your business has

Business Loans

If a business has outstanding loans, they want to consider protecting themselves against a loan suddenly being called in if a guarantor is no longer able to continue working in the business.

Reliance on key staff

If you are a business which relies on the skills, knowledge and experience of a small number of key staff who are fundamental to the business, you may want to consider protecting your business if one of these people were suddenly unable to work in the business.

Sole Traders/Partnerships

Sole Traders or Partnerships who have substantial business valuations may also want to consider a keyman policy.

Benefits of Keyman Insurance

Provides funds to cover replacement employees’ salary or can help fund the search or recruitment for a new employee.Help cover any losses that result in the key person within the business leavingProvide funds to the business to cover the cost of exiting partners shares in the businessMultiple types of cover availableHelps cover cost of outstanding business loans

Which employees should be covered?

Generally employees who are owners, directors or senior executives, or those employees whose skills, knowledge and experience are invaluable to a company should be covered.

How much cover is required?

The amount of cover required will depend on a number of factors:

  • The purpose of the cover
  • The amount of funds that would be required to ensure that the key person’s exit does not leave the business in a worse financial situation
  • Any taxation consequences based on the particular structure you set up.

How is a keyman insurance policy structured?

Generally a keyman policy is owned by the business, with the key person listed as the insured and the business listed as the beneficiary. This means that the directors/owners of the business would also administer the policy on behalf of the business.

Published: March 26, 2015

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