Index | Liability Insurance | Keyman Insurance
Though Keyman Insurance is a fairly new form of insurance and there is no proper legal definition for it, it is deemed an important form of Business Insurance, getting increasingly popular and rather significant nowadays. Businesses always need investments, and lenders more and more often require that a business carries a Keyman Insurance in order to protect their loans in the company. Even if Keyman Insurance is not a requirement to secure financing, the added credibility your company will enjoy with your investors is certainly worth the cost of this insurance policy.
Keyman Insurance is also called Key Person Insurance, or Key Executive Insurance. As these names imply, this is generally an insurance policy, which is designed to protect a business in the event of the death or extended incapacity of an executive or key member of business specified on the policy. By obtaining a Keyman Insurance, a business ensures compensation for financial losses that would arise from the death of the valued member of the business, and also facilitates business continuity.
The major goal of Key Person Business Insurance is to minimize the negative impact of the death, disability or trauma of a key employee, keep the business running and assure creditors and customers that the company is in the similar position and capable of operating as usual. In other words, Keyman Insurance helps to preserve the value of your business and its continuation by replacing the knowledge and work of an insured key employee. Such policies cover the expenses of finding and training a proper replacement for a key person, which in its turn, ensures that the business plan is being carried out as scheduled.
Keyman Insurance compensates losses with a fixed monetary sum specified on the insurance policy. Mind that the policy term does not extend beyond the period during which the key person remains valuable and useful for the business, usually they are 10- or 20-year term insurance policies.
Now, who is the keyman? A key person is someone who makes a significant contribution towards the profitability of the business and whose loss will inevitably cause financial ruin to the business. The skills, knowledge, energy, and capital of a few individuals can be crucial for the success of the company and therefore can make them uniquely valuable to this company. Most companies have at least one employee who can be considered key to the general success of the business, and the loss of this person's services would result in business interruption or failure.
A key person directly associated with the business can be the founder of a company, a Partner, a majority stockholder, a salesperson, the entire management team, a key project manager or some other professional with specific skills or knowledge. Basically, a key person is someone who has an expertise specific to the business or someone responsible for providing a significant portion of business profit.
Absence of a key person could not only significantly impact the profitability and stability of the company; it could also question the future progress of business, and adversely affect existing business goodwill and credit standing. For instance, due to the loss of the key person in an international trade business, trade credit arrangements and years of goodwill and trust can be quickly destroyed. New arrangements require considerable amount of time and effort, which inevitably involves lost business profitability.
The owner and beneficiary of the policy is the employer, while the life insured is the key employee. The latter wouldn't receive any benefit from the existence of the policy. The employer would receive the death benefit proceeds tax free. Proceeds from Keyman Insurance can be used in order to find, recruit and train new skilled professionals for the company. Keyman Insurance benefits are also used to buy out the insured person's shares or interest in the company.
Premiums for Keyman Insurance are normally based on such factors as the amount of coverage, age, physical condition, and overall health history of the covered individual. Costs can be fairly low in case the key person is young and in good shape. Premiums are not tax-deductible.
Before a business owner decides to purchase Key Person Insurance, it is necessary to assess the value of key employees. You need to determine how much coverage you will need. In order to estimate the value of the key employee, you should consider such factors as anticipated profit losses, the amount of sales the key employee generated for the company, and the costs of replacing the key employee.
Good planning is essential. Creating a business-continuation plan outlining the way your business will survive a loss will help you determine what type of insurance protection you require. All insurance policies within a business must be integrated with the overall plan of the business.
Start-up companies tend to rely on the skills and energy of the most valued members of their team more than any other companies. They are a start-up company's most valuable assets. The death or disability of a key employee of a start-up company may result in business failure. Purchasing a Keyman Life and Disability Insurance on the key people will protect the start-up business from a potential disaster. Moreover, when making a decision whether or not to fund a company, venture capitalists, banks and other lenders usually require Keyman Insurance for the startup companies. It allows them to protect their investments. In case the insured accident occurs, the Keyman Insurance payment goes to the start-up company or directly to the venture capitalist.
Keyman Insurance may be just as crucial to "niche" category businesses: research firms, companies with special contracts and businesses with proprietary systems and patents. Their key employees are crucial for the success of their businesses, as they have unique niche expertise, which is hard to replace.
Usually businesses have prearranged agreements which include the instructions for the event of the death or disability of a shareholder or business owner. Key Person Insurance is the most efficient and cost effective means to fund these agreements.