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Business continuity is paramount. Make sure your key staff are covered with Key Man Insurance.

Roxburgh Financial Management


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How Does A Key Man Insurance Policy Work?

What would you do if a key staff member were suddenly gone? What is keyman insurance?

Key man insurance or sometimes referred to as key person insurance is a type of insurance cover that a company can take for an important person.

The individual covered is usually integral to the running and success of the business. Such a person can be the owner, manager, top talent or employee with a unique set of skills.

This policy may be taken for one person or more depending on the discretion of the company’s management. This policy is designed to cushion the company from the shock that can be associated with the loss of the key person.

The policy covers death or severe illness. It can also cover both situations.

In most cases a key man policy is owned by the business entity. This means that if a risk occurs it is the company that lodges a request for compensation and once verified the business is given the amount as stipulated in the policy.

There are a few situations where the policy may be owned by the person insured or a third party as determined by the people responsible for making decisions on behalf of the company.

Some benefits of a key man policy;

  • Protect against financial loss
  • Protect against the loss of key skills
  • Protect corporate finance guarantees

You’ve insured your business against theft, acts of god, even malicious damage by a member of staff.

But what will you do if your star performer, the one person that makes the company soar, died suddenly or was injured in an accident and out of action for many months.

How will your business cope with the inevitable losses and downturn in profits, or keep up with business loan repayments or any financial guarantees made against that person?

How will you keep the confidence of your creditors and suppliers?

Keyman Insurance can help by providing your business with compensation when a key member of staff cannot work through death or illness. It will allow you to:

  • Ensure business continuity
  • Hire or train replacement staff to maintain key business skills
  • Sort out share ownership issues
  • Offset lost income
  • Protect guarantee business loans or banking facilities
  • Keep up with debt repayments
  • Maintain creditor confidence
  • Sort out staff loan repayments
  • Preserve the value of your business

Life Insurance For Your Business

Key man Insurance is a form of life insurance for your business and is a vital part of any business planning for a long, profitable life. The policy pays out a fixed monetary amount that can be spent any way you choose to mitigate and adapt to the loss of a key member of staff.

Your could cover the costs of hiring and training both temporary and permanent replacements, pay for losses incurred by delaying or even abandoning projects, and make sure the full amount of any guarantees on loans taken out in your key person’s name are covered.

Another type of policy is called a relevant life policy, which come with additional tax benefits for the company and the person who takes out the cover.

The Worth Of The Policy

The amount of money that is used to ensure the person of interest is largely dependent on the company that is seeking the cover. It is worth pointing out that the amount of compensation is determined after careful consideration of various factors.

The amount of money paid in the form of premium paid to ensure a 60 year old person is more costly when compared to the amount of money paid for a 20 year old.

This is because the older person is at a greater risk of falling ill or dying. The type of work and lifestyle that the key man leads may also play a role in the calculations that are done.

Why Key Man Insurance Is Important

Can cover pending payments – a company may sometimes have pending bills such as secured loans or business credit cards that must be paid regardless of profitability. If a key man in the company passes away it may be difficult for the company to raise enough funds to settle its payments.

The insurance policy comes into play in such a situation. Lets say for instance your company had an invoice factoring agreement that needed to be paid.

The compensation that is given by the insurance company can be used to settle such pending bills.

Hiring of a new person – severe illness or the death of an important person may mean that the company is no longer able to function. This raises the need to have a replacement as soon as possible.

The insurance compensation can be used to scout for and recruit a new candidate for the position that is left vacant.

Cushioning other employees – when the most important person to a business person on other employees may end up being jobless and this may have devastating effects.

Key man insurance compensation helps in cushioning other employees from the effects of suddenly becoming jobless.

To cover possible losses – for a business to continue running it must be profitable. However, when the key man in a business falls ill for an extended period of time or passes away there is likely to be a period through which the business will experience complications and may not make any profits.

This insurance policy ensures that the business remains afloat even when it is not making any profits.

Guards investor interests – investors can only commit their money to a venture that has the possibility of generating significant income.

To convince investors to contribute their own money you must come up with a way to convince them that the business is going to earn them income regardless of the risks that prevail.

Taking a key man insurance cover is one of the ways to achieve success when convincing investors. In case the risk that is stipulated occurs investors can rest assured of adequate compensation from the insurance company.

Boosts morale – an employee that is regarded as the key man is likely to put in more effort in his or her endeavours. The fact that they are insured against possible risks elevates the professional’s status and boosts morale.

It is worth pointing out that when other employees take note of the privileges of the key man they are likely to strive to achieve such status too.

Protects company valuation – in case a company is put up for sale potential buyers are likely to examine various aspects of the business before determining if it is worth the amount it is being offered for. The value of a business that has insurance cover in one way or another boosts its general value.

May help in loan approvals – when the company is seeking a loan it can use this policy to increase the chances of having its request approved. The lending institution is likely to be at ease extending a loan offer to a company that has a back up plan in case its key figure is affected in one way or another.

Retention of important employees – workers that are exceptional in the work they do are likely to get multiple offers from competing companies. A television show presenter with a program that attracts the attention of millions of viewers is likely to be an asset to any television network in the market.

To win the loyalty of such an individual it may be necessary to insure them through such a policy.

Choosing The Best Company To Provide Key Man Insurance

Check the ratings – before you apply for an insurance cover from any company it is important for you to have a look at its ratings. This can be done by going through professional reviews that have been published by experts.

Such people often share information regarding company policies, their rate of compensation and quality of service delivery. Avoid companies that do not have impressive ratings because they may end up disappointing you in the future.

Period of operations – when a company has been actively offering its services for a long period you can be sure that it understands that complexities that are involved in the business.

Companies that have managed to remain relevant through the years have probably come up with policies and service delivery solutions that are suited to the needs of different types of clients.

Policies on offer – some insurance companies are known for providing good policies on life insurance while others may be better suited to offer insurance policies on property.

It is prudent for you to do some research and determine the companies that are often associated with key man insurance.

Check for complaints – when a risk related to key man policy occurs the last thing you want is for the insuring company to drag its feet before offering compensation. That is why you should be keen on complaints that have been lodged by other people.

Any company that seems to be rigid or unresponsive when it comes to compensation should be shunned.

Talk to a professional – if you are still unsure about the best company to pick it may be wise to get in touch with a professional such as an agent or broker. Such individuals have had the opportunity to work with various companies and are therefore aware of some of the best in the market.

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