Keyman Person Insurance

Key person insurance is when a business takes out a life insurance policy on a key person within a business. Generally the policy owner of the life insurance policy will be the business and the life insurance policy will insure the key person or an employee that is crucial to the business.

Essentially this means that the business will receive a lump sum payment if this key person passes away or is diagnosed with a terminal illness, the business can then use the funds to either find a replacement with their skills or they could use the proceeds to pay down debts that the key person may have been a guarantor for.

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What is Keyman Insurance?

Keyman insurance provides protection to a business by the business taking out a life insurance, TPD or trauma insurance policy on a key person or critical employee to the business. Usually the business will be the policy owner and beneficiary of the policy should it pay out. The payment can then be used by the business to replace the lost revenue the employee usually generated or to find a replacement employee or if the employee is a guarantor, the funds may be used to pay down debts of 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

Trauma

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.

Keyman Insurance FAQ

When a business owns a life insurance policy on a key man, e.g. a director, shareholder or another person critical to the business. The life insurance policy serves to protect the business against the financial loss in the event of a key man’s death.
Key person insurance minimises financial risk associated with the untimely death of a key person in the business. The policy is taken out by the business to ensure its security. The lump sum payment received could then be used to replace lost revenue, or pay off debts.
A key person is a person essential to generating revenue or providing technical know-how or managing and overseeing activities of the business. The loss of a key person, due to death or illness, could negatively affect the ongoing operations of the business, for example delaying critical projects.
Key employee life insurance is a policy generally taken out on key personnel in the business. An employee who contributes substantially to the success of the business and without whom the business might struggle. The policy is owned by the business to protect its interests in case of the untimely key employee’s death.
Published: November 18, 2016
  • Capital Protection

    How to structure your key man cover to provide capital protection against any business loans or personal guarantees. Find out about Policy structuring, ownership and beneficiary options

  • Revenue Protection

    Keyman Insurance revenue protection – policy ownership options, tax implications, cover types and the level of cover required for small business owners!

  • Buy Sell Insurance

    A guide to buy and sell insurance policies – find out how you can protect your business, how much cover you may need, ownership options and types of cover are available to you!

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