What is keyman insurance?
The smaller the company the more vulnerable it is to loss due to sickness or death of key personnel.
A healthy company with two or three managers or directors will severely feel the loss of just one person. A sole trader will cease to exist if that person is unable to work.
A key person can be the owner, but also an employee with specialist technical skills who is difficult to replace.
It is common practice to insure machinery, and it should be to insure personnel too. A machine can be replaced fairly quickly and without fuss – an important person less so. Unfortunately, many companies don't and it is not until a calamity happens that the consequences for such an oversight are apparent.
With a keyperson down the following can happen:
- The company loses money
- The banks become jittery and call in company overdrafts
- The dissolution of a partnership
- Friction in the boardroom
A firm can insure the key individuals for a capital sum (the “sum assured”) to balance with the estimated financial loss to the business in the event of death of serious illness.
This is essential planning for the future and preparing for potential calamities. Unlike a life or critical illness policy the money goes directly to the company rather than to the individual.
If an individual is unable to work for a protracted period then it may be necessary to employ temporary staff or to sustain profits in the event of a dip.
Examples of a key man:
- CEO or executive
- Production manager
- Distribution manager
- Head of sales and marketing
Is you are asking yourself just what is keyman insurance then it can take the form of the following:
Shareholder protection
This is a business continuation agreement between shareholders, backed up by a series of life assurance policies and trusts.
The continuation agreement lays down the conditions for the disposal of shares while the life assurance policies provide the finance.
With a cross option agreement the surviving shareholders have an option to buy the shares from the deceased shareholder's executives while the legal representatives of the deceased shareholder have an option to sell the shares to the surviving shareholders
Partnership protection
Similar to shareholder schemes, the three main forms of agreements are the “buy to sell”, the “cross option” and “automatic accrual”.
Short-term illness and disability
Not all illnesses are terminal but can be debilitating over the short to medium term. Life or critical illness policies are not appropriate for these kind of scenarios, but other forms of insurance can be taken out while the individual recuperates over a number of weeks or months.
Please note that key man insurance is complicated and no policy should be taken out without professional advice first.
There are many variables to consider, which is where we can help. We can put you in touch with an expert in the field of business and keyman insurance, who can then explain the various options available to you, allowing you to ensure that anything you may decide to do is right for your circumstances. All our independent advisers source the whole of the market to secure the correct deal for you.
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