Find the Right Keyman Insurance to Protect Your Business from Loss
Find the Right Keyman Insurance
to Protect Your Business from Loss
When a key person, such as a business partner, key employee or owner is unable to work or passes away, it affects business profits, revenue and expenses, and might even influence the business’s ability to attract new customers. Keyman insurance protects the company against the possible costs associated with the loss of a person, who is essential to the business.
Ask yourself, what would happen if a key individual in the company were to suffer an accident or illness and can no longer work? What impact would their death or disablement have on the business?
Reduce the financial burden that comes with losing a key person in your business with a keyman insurance policy.
The events that could trigger the loss of an individual need to be insured, for example, an accident, illness, injury, disablement or death.
Keyman insurance can take the form of life cover, TPD or trauma insurance. The lump sum benefit can be used to reduce the financial burden a business may suffer from the loss of a key person.
Keyman Insurance is designed to protect the business, not the individual.
Economic gain means more than just profits. It can also include capital injections, cost efficiency, goodwill, access to credit and contacts with suppliers and customers.
A key man is that person or those people without whom the company will not be able to continue business as usual. For example:
- Director of the company
- Business partner
- Key salesperson/manager
- Financial controller
- Key project manager
- An employee with a specific skill set or knowledge, like a Computer programmer or Specialist engineer
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Who needs this cover?
If your business profitability hinges on the continued input of one or more people, principals and/or highly skilled employees, you probably need keyman insurance to cover:
- Daily expenses: Provides the business with the ability to pay the day-to-day running costs of the company.
- Loss of revenue: Keyman insurance can be used to offset lost income due to lost sales, cancellations, and loss of new opportunities.
- Business loans: Protect your business by covering the person involved in guaranteeing business loans or bank facilities.
- Recruitment and training: You’ll likely need to pay for hiring and training a suitable replacement.
- Restructuring of the business: If the key person was a business owner, partner or director you might need funds to secure new partners without having to shut down the company.
- Co-founder’s shares: If the co-founder of the company should die or become totally and permanently disabled, you might have to compensate the family to retain full ownership of the company.
Because the business owns the key person insurance policies and pays the premiums, the key individual has no interest or right to the policy. In exchange for premiums paid, your key man life insurance policy covers the most important people in your business.
A key person Insurance policy can cover the essential individual for a combination of any of the following:
- Life insurance: Covers the death of a key person.
- Total and Permanent Disability (TPD) insurance: For key people have lost limbs or their sight.
- Trauma insurance: Should the key individual suffer a heart attack, stroke, cancer or paraplegia, for example.
There are three main types of keyman insurance policies available in Australia: Revenue or Capital Protection, and Buy Sell insurance.
A case study
William runs a successful chemical manufacturing company and employs a certified industrial chemist, Karl, who is critical to the business’ core activities.
Karl's loss would have a significant impact on the business, resulting in temporary replacement costs, recruitment costs and perhaps additional training for a replacement. Thus, William would like to ensure the company is protected should Karl’s be unable to work due to illness, disability or death.
The manufacturing company purchases a life, TPD and trauma policy on Karl’s life with the intention of using the policy proceeds to temporarily replace Karl while they attract a replacement with his specialised skills.
In this example, key person insurance would be for revenue protection, which means the insurance premiums would be deductible, and the policy proceeds would be taxed as ordinary income by manufacturing company.
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How much cover should I have?
The amount of keyman life insurance coverage you need depends on the size of your business and the purpose of the keyman insurance policy, i.e. for revenue or capital purposes. Generally, the smaller the enterprise, the more likely it is to be dependent on one or a few key people.
Businesses that are especially vulnerable to key person risk include those whose owners are ‘the face of the company’ and those whose principals are indispensable, either because of their unique skills/expertise or extraordinary and often undocumented, input.
However, generally, the amount of cover required might be calculated based on the amount of profit a key person brings to the company and the loss that would occur without them.
To help you determine how much coverage you need, consider how much time and money the business would need to recover if:
- A key income producing Executive Director dies or becomes disabled;
- A business loan guarantor dies;
- A key business employee suddenly suffers a traumatic event (such as cancer) and is unable to work, having to take 6 months off work;
- A joint business partner dies, and the company shares are passed onto a former business partner’s estate. The former business partner now owns this part of the business and might become a decision maker.
Each business or company is different, and so each keyman insurance policy should be tailored to meet the company’s unique needs. If your business already has credit insurance which covers outstanding loans and debt amounts, you might not need as much keyman insurance.
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What does this type of insurance cost?
The cost of a keyman policy varies from insurer to insurer and will depend on several factors, including; the level of cover you want, he key person’s age, health and specific occupation, and the size and complexity of the business.
The average cost of keyman insurance in Australia
| Insurer | Policy | Average Monthly Premium |
|---|---|---|
| Priority Protection Vitality | $42.19 |
 | Elevate Insurance Solutions – Healthy Start | $44.24 |
| Accelerated Protection – Health Sense | $46.11 |
| Complete – Healthy Life Option | $48.90 |
| Life Solutions | $52.33 |
| Insurance with On Track | $52.92 |
| Wealth Protection | $55.68 |
| Protection | $55.88 |
| OneCare | $57.34 |
| Protection Plans | $61.48 |
Above costs of keyman insurance were calculated on $1 million life cover for a non-smoking, male key person aged 40, living in NSW (April 2018).
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