Why is Keyman Insurance important?
Keyman Insurance is designed to protect the business, not the individual. Many people do not realize how important protecting the business is, and as a result structure their policy incorrectly.
Businesses large and small across Australia should consider looking at taking out a keyman insurance policy on any key person or employees in their business. Consider what would happen to your company or business in the following situations were any of the following could occur:
- 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 & the company shares are passed onto a former business partner’s estate. The former business partner now owns this part of the business & may have possibly become a decision maker.
An appropriate keyman insurance policy can protect the business during these events.
Types of Keyman Insurance Cover
There are basically three main types of keyman insurance Revenue or Capital Protection, and buy sell insurance:
1. Loss of Revenue
This covers the business if you lose a key employee or director for an extended period of time or indefinitely. A keyman insurance policy provides compensation which allows the business to use the proceeds to cover hiring a replacement.
2. Capital Protection
Keyman insurance also covers key persons who are guarantors on business loans or credit facilities. When this person passes away or has an extended disability, the bank may call on the facility to be paid back or may no longer be made available.
3. Buy Sell Insurance
Buy sell insurance covers shares in the business and/ or partnership interests. There are many ways in which this works technically, however it generally provides a mechanism by which business interests can be transferred between owners on death, disablement or critical illness.
How much Key Person Insurance cover is required?
This is a great question and it really depends on the purpose of the keyman insurance policy as listed above & how this is to be structured as there can be different tax effects on different structures. All these factors should be taken into consideration when determining the level of keyman insurance required.
There is no quick fit when it comes to keyman insurance. Each business or company is different, and so each keyman insurance policy should be tailored to meet the businesses unique needs.
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