Keyman insurance or Key Person Insurance is a type of Life Insurance Policy set up to protect a business, from here we will refer to it as Key Insurance. In a Key Insurance policy the business is listed as the beneficiary and/or policy owner. A Key Insurance policy can cover the key person for a combination of any of the following:
- Life insurance
- Total and Permanent Disability insurance
- Trauma insurance
- Income Protection insurance
What is Key Insurance for?
Key Insurance protects the business, not an individual. Many people do not know how important it is to protect their business, and so structure their policy incorrectly.
Businesses large and small across Australia should consider taking out a key insurance policy on any key person or employees in their business.
Consider what would happen to a company or business if any of the following situations were to occur:
- A key income producing Executive Director dies or becomes disabled;
- A business loan guarantor dies;
- A key employee (in a small business) experiences a traumatic event (such as cancer) and is unable to work or has to take 6 months off work;
- A joint business partner dies & their company shares are passed onto their estate. Your deceased business partner’s partner now owns part of the business and could possibly become a decision maker.
An appropriate key insurance policy can protect the business during these events.
Types Keyman Insurance Cover
Basically there are three main types of keyman insurance Revenue or Capital Protection, and buy sell insurance:
- Loss of Revenue: This covers the business if you lose a key employee or director for an extended period of time or indefinitely. A Key insurance policy provides compensation which allows the business to use the proceeds to cover hiring a replacement.
- Capital Protection: Key insurance covers key persons who are guarantors on business loans or credit facilities. When this person dies or has an extended disability, the bank may call on the facility to be paid back or may no longer be made available.
- 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 Insurance Cover is required?
It really depends on the purpose of the policy (see above) & how the policy is structured; there can different tax impacts depending on the structure of the policy. All these factors should be considered when determining the appropriate level of key insurance required.
Key Person Insurance for a business or company owner
There is no quick fit when it comes to keyman insurance. Each business or company is different, and so each key insurance policy must be tailored to meet the businesses unique needs.
