Protect your business against the loss of crucial employees with a keyman insurance policy
Keyman insurance is essentially a life insurance policy taken out by your business on critically important employees. Key man insurance is designed to prevent businesses from being crippled or destroyed by the loss of crucial workers.
To receive keyman insurance quotes for you to compare, simply enter your details in the form below and an adviser will be in touch. Alternatively, read on for a step by step guide to finding your own key person insurance policy.
Steps identify a key person
Key people are those whose skills, experience or expertise make a huge financial contribution to your company. Some keyman insurance policies have specific requirements for this, such as the key person being responsible for more than a third of the company’s revenue, while others let you nominate key people at your discretion.A key person might be:
- A programmer or technician whose skills and knowledge keeps essential systems running
- A management analyst who helps you plan and make decisions
- A senior business partner with important connections
- The sole proprietor or CEO of a business
- A high-achieving salesperson who dependably brings in revenue
To identify a key employee, try asking yourself a few questions.
- Are they greatly missed while on holiday?
- Is there anything that only they can do?
- How much money will the business lose without this person over the next week or month?
- How would the company be financially impacted if they were to suddenly disappear?
Your business might have more than one key person. You can nominate as many as needed, including yourself if necessary, but remember that each policy carries costs.
What are the benefits of keyman insurance?
Key person insurance, as mentioned, covers your business or company from certain financial losses when the nominated person dies or is unable to work.If this happens you can make a claim. Once approved, you will be paid a lump sum benefit that can be used to cover important expenses like:
- Buying a partner's share of the company from their inheritors after they pass away
- Recruiting and training a replacement for the key person, or hiring a temporary stand in until you find one
- Covering financial losses resulting from cancelled or delayed projects
- Repaying debts and loans, as a guarantee when taking on new debt, and to further expand your business
- Funding ongoing business costs or any other undertaking your company is involved in
How to find the right keyman insurance policy
Keyman insurance features, benefits, and even the definition of a key person vary between providers. To find a suitable policy you can:
Calculate your needs
Work out how much money will be needed to get your business back on track if a key person disappears, and how much you are willing to pay in premiums, then compare policies within these boundaries. Your calculation should also include all financial aspects like:
- Paying off loans, particularly those personally guaranteed by the key person
- Reclaiming lost revenue and rebuilding your income,
- Buying ownership of the company from the key person’s inheritors
- Recruiting and training a replacement, and hiring a temporary stand-in
- Maintaining business capital and replacing lost goodwill
- Paying benefits to the key person’s beneficiaries if applicable
- Any other fees, lost clients, customers or revenue, damage to your business and other expenses
It’s not always possible to predict the costs, so there are two popular shortcuts for working out keyman insurance sum insured:
- Contribution to earnings: Try working out what percentage of the company’s income would not be possible without your key person, and take this percent of the annual revenue to get a “yearly value”. For example, a top salesperson behind 60% of your annual $1 million revenue will have a yearly value of $600,000. Estimate how long it will take to get an equal quality replacement, and multiply the yearly value by this length of time to get a roughly suitable sum insured. In this example, you might estimate that it will take three years to replace the salesman, for a ballpark sum insured of $1.8 million. Mostly to cover lost revenue from an absent salesperson, but with enough to pay for other expenses too.
- Multiples of income: This is a popular shortcut. Simply take the key employee’s current salary and multiply it by 5-7 depending on how vital they are.
Understand the different types of cover.
In Australia you will need to select either revenue or capital purposes when taking out a keyman insurance policy. This has important tax implications which are explained here, but does not actually affect what you can actually spend the money on. Other factors to consider in line with the specific terms of your policy may include:
- If your key person insurance policy covers disability or temporary inability to work, or death only. Some policies will also pay monthly benefits to the business, for a limited period of time, if the key person is temporarily unable to work due to sickness or injury.
- Whether you have a buy/sell agreement in place. If one board member of a company passes away, these agreements automatically let the other members acquire their portion of business ownership. Certain policies may require buy/sell agreements, but most do not.
- Exclusions applied. Some keyman policies will only pay benefits in certain circumstances. For example, they might not pay benefits for certain accidents or self-inflicted injuries.
- Waiting periods. Almost all policies will come with a build-in waiting period, typically a few months. You cannot claim any benefits before the end of this waiting period.
How are revenue and capital protection different?
When you take out key man insurance, you are required to document its purpose in writing, such as in the form of meeting minutes. You must select either revenue purpose or capital purpose for tax requirements.
- Capital purpose is for money you plan to use on purposes related to business capital, or the on-paper value of the company. This includes paying off shareholder loans and other debt, protecting the business’ credit rating, reacquiring company ownership and more.
- Revenue purpose is for funds intended to bolster revenue following the loss of a key person. This includes uses like directly offsetting fewer sales or other loss of revenue, recruiting and training a replacement and further expanding a business.
Depending on which you select, premiums paid and benefits claimed may or may not be taxable.
|Are premiums tax deductible?||Are insurance benefits taxed?||Are the insurance benefits subject to capital gains tax?|
|Conditions||Only for business taxes||Only for business taxes||Benefits are subject to capital gains tax if the recipient is not business, and is not a relative of the key person|
If and when the time comes, you are still free to spend the money on whatever is needed, regardless of whether it’s been earmarked for revenue or capital purposes. For auditing by the Australian Taxation Office (ATO), you also need to show how benefits have been used. Revenue losses will need to be shown in your profit statements while capital losses should be clearly shown on the balance sheet.
Steps to take out keyman insurance with an adviser
An insurance broker or financial adviser can be a big help when taking out keyman insurance. Many of them specialise in business insurance needs so they can answer any questions you have and help you find a solution that suits your company.
- Choose an adviser or insurance broker. Ideally they will be a specialist in small, medium or large business insurance needs, including key person policies. You should check their credentials and ask what kind of clients they usually work with.
- Discuss your needs and current financial situation with them. They may ask for documentation or information that can help them assess the situation.
- Use their advice to determine who the key people are, how much cover is needed for each and which policies offer good terms within an acceptable price range.
- Let them advise you on other factors like implementing buy/sell agreements, continuity planning, business recovery plans following the loss of a key person and other requirements.
- Many advisers and brokers will directly liaise with insurance companies themselves, in which case you can let them take out policies and get everything sorted, and then confirm everything is in order. Some will also offer ongoing insurance management, and you may depend on them to make and follow up on claims, or adjust the terms of your policy if needed.
Business insurance needs can be complex, and keyman insurance in particular might have far reaching implications. If you aren’t certain you can navigate the issue alone then it might be a good idea to take advantage of an adviser.