What is Key Man Insurance?
In general, key man or key person insurance is a form of insurance for a business (usually a limited company in the UK, but it can also be acquired by a sole trader) where the business takes out an insurance policy in order to compensate the financial losses associated with the loss of a key person, either through death or prolonged incapacitation.
There is nothing much that differentiates as key man insurance policy from a standard or ordinary life insurance policy other than the fact that is taken out by a business for its own protection. The terms of a key man policy depend on the length of time the key person is determined to stay with the business. The general objective of a key man policy is to protect the business, and have it compensated for whatever losses it might incur due to the loss of an important member of the business, either permanently or indefinitely. It is important to keep in mind, however, that a key man insurance policy does not actually indemnify or cover the actual or real losses of the business but covers a fixed sum that has been specified on the policy.
Why take out a key man insurance policy?
The fact of the matter is that all businesses rely on a key person (or several key persons) who are responsible for generating profit and income. These people are seen as major contributors to the growth and continuity of the business and are considered valuable to the company’s longevity and success. A key person can also be someone who has a specific set of skills who would be hard to replace. Businesses are encouraged to take out key man insurance policies on individuals in their company whose work, knowledge, and overall usefulness and contribution are see as immensely valuable. If an employer loses such an individual. They would have to face costs associated with the hiring of a replacement or losses due to the company’s reduced ability to transact business (and make profit) until the person’s successor is found or trained.
Insurable categories of losses
Compensation for a key man insurance policy can be divided into four main categories, which include the loss related to the period of time when the individual is absent from work and the company needs to find a temporary replacement and train them. Another category is the protection of the business profits (i.e., lost profits and sales opportunities, loss from the delay of a project or a project’s cancelation, loss of special knowledge of skills, etc.). the third category is the protection of the company’s partners and shareholders and the fourth is cover those who are involved in providing loans for the business or other financing facilities.
Who is eligible?
Anyone working for the company or directly allied with the company whose death or incapacitation would cause a tremendous effect on the productivity and finances of the business is eligible for key man insurance. This can include a company’s directors, partners, project managers, senior sales personnel, or employees with specific skill sets or knowledge that benefits the company.
Speak to us today to discuss how your business could benefit from a Key Man protection policy.