KEY MAN INSURANCE

What is Key Man Insurance?  What are the Advantages of having this Insurance?          Who could use a policy like this? 
Key Person Insurance, also commonly called Key Man Insurance or 'Key Employee Insurance' (for either a man or woman), is an important form of Business Insurance. There is no legal definition of "Key Person Insurance". 

In general, it can be described as an Insurance Policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business.      To put it simply, Key Man Insurance is a standard Life Insurance or Trauma Insurance Policy that is used for business succession or business protection purposes.  The Policy's term does not extend beyond the period of the Key Person’s usefulness to the business.  Key Man policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity.  Key Man Insurance does not indemnify the actual losses incurred, but compensates with a fixed monetary sum as specified in the Insurance Policy.

Many businesses have a Key Person who is responsible for the majority of profits or has a unique and hard to replace skill set such as Intellectual Property that is vital / critical to the organization.  An Employer may take out a Key Man Insurance Policy on the life or health of any Employee whose knowledge, work, or overall contribution is considered uniquely valuable or highly contributory to the Company's success and livelihood.  The Employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained), with which the Employer is likely to suffer financially in the event of the loss of that Key Person.

There are four categories of loss for which Key Man Insurance can provide compensation:
  1. Losses related to the extended period when a Key Person is unable to work, to provide temporary personnel and, if necessary to finance the recruitment and training of a replacement.
  2. Insurance to protect profits.  For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project or orders that the Key Person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge.
  3. Insurance to protect Shareholders or Partnership interests.  Typically this is Insurance to enable shareholdings or partnership interests to be purchased by existing Shareholders or Partners.
  4. Insurance for any person of the Company involved in guaranteeing business loans or banking facilities.  The value of Insurance coverage is arranged to equal the value of the guarantee.​​

what are the advantages of key man insurance?

  1. In case of death of a Key Person the Company is paid money to cope up with the loss.
  2. In the USA, any business concern buying Key Man Insurance for its employee can claim a deduction for the premium paid for the policy as a business expense under Section 37(1) of the Income Tax Act.  Tax deductions may also apply in other countries.
  3. This Policy can be used as either an extra superannuation benefit or an ex-gratia payment to the Key Employee during the service period.  With recent changes in rules, only a Term Plan is available under Key Man Insurance.  Hence, there will not be any maturity benefit.
  4. No need of giving advanced intimation to the income tax authorities.
  5. For the Executives earning high salaries, this Policy can be given as a hike in salary and saves income tax.
  6. It becomes a great help to the business for their tax planning.
  7. The Directors can also safeguard their immediate family from getting affected by the vagaries of the industry and the various business cycles that the business has to encounter.
  8. A Key Man Insurance Policy helps to improve the retention of key human resources of the business.​

who could use a policy like this?

  1. Smaller Companies with few Employees where at least one (1) Employee has the majority stake of knowledge or attribution to the Company.
  2. Small Family Business where one (1) Family Member is the brains of the Family Business or Operations thereof.
  3. Large Companies with much Intellectual Capital being held amongst various Employees with unique knowledge and skill sets.  Designation of those Key Persons would need to be identified, as those are the ones that the Company may suffer from if they are no longer actively contributing.
  4. Start-up Companies with limited number of Employees with each Person having specific critical skill sets that are invaluable to the Company, that no other Person in the Company possesses.  Example: one Person is the brains regarding the Global Strategy and Sales, and another is the Technology & Deployment where they do not share or hold the same knowledge or capabilities, therefore their Company would be at High Risk should one of them become disabled or die.
Call Western States Financial regarding a Key Man Insurance Policy in order to protect your Company's success, financial future and longevity.

Call us today @ (951)371-7608