Keyman insurance is an important form of business insurance.
Many businesses have a key person who is responsible for the majority of profits. Or else, the person may be unique with hard to replace skill sets, such as intellectual property, which is vital to the organization. The key person may be an employee whose knowledge, work or overall contribution is considered uniquely valuable to the company.
An employer may take out a keyman insurance policy on the life or health of such employee or employees in the organization.
Keyman insurance can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from death or extended incapacity of an important member of the business.
Keyman insurance is a life insurance policy primarily used for business protection purposes.
Features of Keyman Insurance
The policy’s term does not extend beyond the period of the key person’s usefulness to the business.
Keyman insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified in the insurance policy.
Keyman is a term insurance policy. The sum assured is linked to the profitability of the company rather than the key person’s own income.
The premium is paid by the company.
This is tax efficient as the entire premium is treated as a business expense.
In case the key person dies, the benefit is paid to the company. Unlike individual insurance policies, the death benefit in keyman insurance is taxed as income.
Who can be a key man?
A keyman can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a partner, a key salesperson, key project manager or someone with specific skills or knowledge, which are valuable especially to the company.
What are the insurable losses under the keyman insurance?
The insurable losses may relate to:
The extended period when a key person is unable to work
Providing temporary personnel to finance the recruitment and training of a replacement offsetting of losses
Lost income from lost sales
Losses resulting from the delay or cancellation of a project in which the key person was involved
Loss of opportunity to expand
Loss of specialized skills or knowledge