Key Man Insurance

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What is Key Man Insurance?

Key Man Insurance is designed to protect a business should the key person(s) die or be seriously injured and unable to work. A pre-agreed monetary limit for the loss or absence of this person will be paid out to guard against financial loss.

Small businesses often depend on specific individuals for the company’s success and there could be serious consequences should these individuals become injured or die.

Do I need Key Man Insurance?

If your business’ survival and/or success is dependent on the abilities, expertise, experience, knowledge or skills of any individual(s) then Key Man Insurance could be something you wish to consider. A “key person” can be anyone from an ordinary employee with special expertise to a director. The examples below are certain instances in which Key Man Insurance may be considered:

Example 1

The success or existence of a partnership depends on one or more of the partners.

If one of the partners suddenly died or was unable to work due to a serious injury then Key Man Insurance would provide financial support for the remaining partner(s), who could then continue running the business while new talent was found. The pay out would also provide the remaining partner(s) with funds to buy the deceased or seriously injured partner's share.

Example 2

An employee/owner/manager generates a high percentage of sales.

Should this individual become injured, the insurance should cover lost sales revenue while they recover. In the event that they should die, the insurance should protect the business until a replacement can be found.

Other reasons Key Man Insurance may be considered are:

to protect shareholders (ensuring that the shares do not pass to other parties)

to insure anyone involved in guaranteeing businesses loans or banking facilities.

Key Man Insurance is a highly specialised area so it's best to seek advice from an independent financial adviser to find out if this is appropriate for your company.

How much will the policy pay out?

This should reflect the potential loss to the business in the event that the key person dies or is unable to work. Normally there are three ways of estimating the sum assured:

Multiple of profits

Up to five times annual net profit or two years gross profit, divided by the number of key persons

Multiple of salary

The business can usually insure the key person for up to ten years salary

Proportionate share of payroll

This is calculated by: salary / total payroll X annual turnover X years required to recruit and train a replacement.

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