Key man insurance

Key person insurance, also commonly called keyman insurance and key man insurance, is an important form of business insurance. There is no legal definition for "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, Keyman Insurance is a standard life insurance, TPD 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. Keyman Insurance 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 person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on 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 to the organization. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. 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) which the employer is likely to suffer in the event of the loss of a key person.

As key person insurance is more of a type of insurance policy than an actual policy, the term is used somewhat loosely and may include other insurance used for other business specific purposes, including:

There are four categories of loss for which key person insurance can provide compensation:

Key people are individuals whose skills, knowledge, experience or leadership are important to a business’ continued financial success. Should something happen to one of these individuals it is likely that their loss will have a detrimental impact on the profitability of the business and will cause financial strain. Examples of a key individual include, but are not limited to: company directors, sales directors, IT specialist, managing directors and heads of product development.

Deciding on the sum of money to ensure the key person is dependent on the company and the reason for insuring that individual. It can be to cover a loan or investment amount, or it can be dependent on working out the worth of the person to the company. It is recommended that you 'think about loss of profits, cost of replacement and debts that would need to be covered to keep the company running without that person.'

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Wikipedia