What is keyman insurance and do I need it?

Your business is likely to have a few key people who are vital to the success of the company – and this includes you! This might be just the founder, or might also include the main sales person or the person who directs the operations. As a business owner, you know that your most valuable asset is the people within your company; their expertise and contributions are essential to your success. But what would happen if one of these key individuals were to unexpectedly be injured, suffer from a long-term illness or even die? This is where keyman insurance comes into play.

What is keyman insurance?

Keyman insurance is a type of life insurance policy that is taken out by a business on the life of one of its key employees or owners. The purpose of keyman insurance is to provide financial protection to the business to cover for various events that might happen to the insured individual. This insurance policy ensures that the business can continue to operate during difficult times by providing a lump sum payment that can be used to cover expenses, recruit and train replacements, or even repay debts.

Keyman insurance is important for several reasons:

• Firstly, it safeguards the financial stability of the business by providing a safety net in case of a sudden loss of a key employee.
• Secondly, it allows the company to navigate through the transitional period without incurring significant financial losses or disruptions.
• Lastly, it ensures that the business can continue to provide a service to clients, suppliers, and other stakeholders, thereby preserving its reputation and maintaining trust in the market.

This type of insurance policy is only designed to be for just a very few people in the business rather than the entire team. A key person would be identified as someone without whom the business would not operate as normal – it might not just be the CEO or founder, it could be a key engineer or someone with specialist skills. 

Key man insurance, also known as crucial worker insurance, is a type of policy that names one or two people in your small business and provides an insurance payout to your business if the key member of your workforce is unable to work for whatever reason – providing your business with financial help during this period. For example, if a key person is away from work and your company has a delay or cancellation of an important project, then this could be a situation in which you claim on the policy.

Who needs keyman insurance?

While keyman insurance is valuable for businesses of all sizes and industries, it is particularly crucial for small and medium-sized enterprises (SMEs) that heavily rely on the expertise of a few key individuals. Startups and family-owned businesses are also prime candidates for keyman insurance, as their success often relies on a single founder or family member.

If your business has debts, loans, or financial obligations then you should also consider some form of key person insurance to protect your business against the risk of defaulting on their financial commitments in the event of the key person’s incapacity.

How does keyman insurance work?

This type of insurance policy is taken out by the business on the key employee or owner. The business pays the premiums and is the policy’s beneficiary. In the event of the insured individual’s death or inability to work, the insurance company will normally pay out a lump sum to the business.

It’s important to work out the amount of cover required and for this you need to assess the financial impact that the loss of the key person would have on your company. Factors to consider include the person’s role, their contribution to revenue generation, their level of expertise, and the cost of recruiting and training a replacement. An insurance advisor can help assess the level of cover required to be sure the policy adequately protects the business.

Keyman insurance vs. personal life insurance

Keyman insurance is often confused with personal life insurance, but there are key differences between the two. The main difference is that personal life insurance is taken out by individuals to provide financial protection for their families in the event of their death whereas keyman insurance is specifically designed to protect the business from the loss of a key person.

While personal life insurance focuses on the individual’s family and personal needs, keyman insurance focuses on the financial impact of the individual’s absence on the business. The policy payout from personal life insurance goes to the individual’s beneficiaries, whereas the payout from keyman insurance goes to the business to cover expenses and ensure the company can continue to operate.

Types of insurance policy

There are different types of keyman insurance policies available to businesses. The most common types include:

1. Term Life Insurance: This type of policy provides coverage for a specific term, typically 10, 15, or 20 years. It offers a cost-effective solution for businesses that require coverage for a defined period.
2. Whole Life Insurance: Unlike term life insurance, whole life insurance provides coverage for the entire lifetime of the insured individual. It also accumulates a cash value over time, which can be borrowed against if needed.
3. Critical Illness Insurance: This policy pays out a lump sum if the insured individual is diagnosed with a critical illness specified in the policy. It can provide valuable financial support during the recovery period.
4. Disability Insurance: Disability insurance provides income replacement if the insured individual becomes disabled and is unable to work. It ensures that the business can continue to meet its financial obligations even if the key person is unable to contribute.

Choosing a keyman insurance policy

Choosing the right keyman insurance policy for your business requires careful consideration. Here are some factors to keep in mind:

1. Coverage Amount: Assess the financial impact of losing the key person and ensure the coverage amount is sufficient to cover expenses and obligations.
2. Premiums: Compare premiums from different providers to ensure you get the best value for your money.
3. Policy Terms: Review the policy terms and conditions, including exclusions and waiting periods, to ensure they align with your business’s needs.
4. Provider’s Reputation: Choose a provider with a strong reputation and financial stability to ensure they will fulfill their obligations in the event of a claim.
5. Flexibility: Look for a policy that offers flexibility in adjusting coverage amounts and terms as your business evolves.

Conclusion

Keyman insurance is a crucial risk management tool for businesses that rely on key individuals. By providing financial protection in the event of a key person’s death or disability, it ensures the business can continue its operations and maintain its financial stability. Assessing your business’s needs, researching providers, and carefully choosing the right policy are essential steps to effectively protect your business’s most valuable asset. Don’t wait until it’s too late – secure the future of your business with keyman insurance today.