Precious assets: ‘key man’ insurance
Insurance is a fundamental part of setting up and running a business. Business owners are likely to ensure that their buildings, stock and equipment are covered by appropriate insurance policies. However, for many companies, their greatest asset will be their people, and key person insurance (also known as “key man” insurance) helps businesses to protect themselves against the loss of their most precious resource.
Put simply, key person insurance is a life insurance policy that is taken out on the “key” person or people within a business. In the event of the key person’s death, serious illness or injury, the company receives a fixed amount of money to buy the business some time to recover. The money might be used to cover the cost of recruiting and training a new employee, or to compensate the business for lost revenues.
It is important to remember that key person insurance is not the same as a personal life insurance, and will not benefit the spouse or family of the individual. The company takes out the policy on the key person, pays the premium, and will be the beneficiary in the event of a claim. Some lenders might stipulate that key person insurance is in place before they are prepared to lend money to a company; in this case, the company will pay the premiums, but the lender would receive any payout.
A key person within a company could be anybody who is regarded as crucial to the business, and whose loss is likely to lead to financial strain. This might be the company’s owner or founder and could also include directors, management or anyone whose loss would be detrimental to the business. An individual could be “key” to the business because of their role, expertise, knowledge or contacts. They could also be crucial because of their financial importance to the business; for example, if they own a significant proportion of shares in the company. Key person insurance can be used to buy back shares in the company, and this helps to ensure that, if the key person is also a major shareholder, overall control does not pass outside the company. However, the value of shares is likely to fluctuate and therefore it is important to remember to review the amount that the policy will pay out, in order to ensure that the fixed payout will cover all the costs.
Paul
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