What Is Key person Insurance

Basics of Key Person Insurance

  • Key person or key man insurance is a type of business insurance plan that protects both mall businesses and large companies when certain crucial employees cannot continue their designated work due to reasons such as illness, disability, loss of job or death.
  • This type of business insurance plan ensures that the beneficiary that is the company gets a compensation payout when the key employee is unable to perform his duties or leaves his job due to any covered reason.
  • Key man plans do not pay out the compensation payment to the family of the policy holder, this type of plan is not a personal life insurance plan. If the company is interested in helping the policy holder as well then, the company can purchase individual insurance, group insurance or insurance under superannuation plans.

 5 Things You Must Know About Key Person Insurance

  • Key man plans, protect companies by making them the beneficiaries of the policy; however the key man will be named as the policy holder of the plan and the insurance plan will be taken against his name. This means that, if the insurance plan is protecting a partnership then the company will receive the company will get financial help from the insurer however; the name on the policy will be of one of the important partners or the person who is crucial to the business.
  • The funds given by the insurer can be used by the company in many ways. These funds can be used to hire another key employee, train the key employee and provide a compensation package or severance package to the previous key employee that is the policy holder. Alternately, the company can use the funds to manage expenses until they find a replacement for the policy holder. In the case of smaller businesses, these funds can be used to purchase the shares from the policy holder or his family if applicable. These funds can also be used to pay off debts that the company may have or pay their dues to employees if the business has decided to close down.
  • While most companies do not believe that a few key employees can be responsible for keeping businesses afloat, in reality many small and medium enterprises rely on a few important employees to keep the company operational. In such cases, key man insurance can prevent companies from closing down or going bankrupt when the key employee has decided to quit, has passed away or cannot work due to health problems.
  • Key man insurance is not required only in one scenario that is; if the company is a sole proprietorship and if the company has only 1 employee that is the proprietor. In such a scenario key person policies are not required unless the person, who is managing the business, finds it important to protect himself and his enterprise.
  • The amount of cover you can purchase to protect each key employee can range from $500,000 to 10 million. While buyers are suggested by some experts to purchase only how much insurance they need, others believe that businesses should opt for at least 10 – 15% additional cover to protect them against unforseen situations that may arise when the key employee decides to quit or cannot work due to any reason.

 5 Tips to Help You Buy Key Person Insurance Online

  • To purchase a plan online, the buyer has to understand his company’s needs. Each type of enterprise needs a different type of cover or a different level of cover. For instance, smaller companies that have only a few employees may need a $500,000 cover in total; however medium to large companies may need a $5 million cover per key employee. If you have questions regarding how much cover you should purchase, then you should consider opting for financial advice from an online expert or an expert in your city.
  • Buyers who are on a budget have the option to purchase standard plans, but buyers who want more than what is normally offered can opt for flexible plans. Purchasing a flexible plan can give the buyer some additional benefits such as the ability to change certain details about the plan online, or the ability to add or reduce cover as and when needed. Flexible plans can cost a little more than standard plans with rigid terms, but flexible plans are more beneficial for companies with changing needs.
  • There are tax implications and other implications of purchasing key man covers. The compensation payment given by the insurer to the company is meant to either cover revenue purposes or capital purposes. While the amount for revenue purposes is tax assessable and the premiums are tax deductible; usually the amount given for capital purposes is not tax assessable which means that the premiums are not tax deductible.
  • Before purchasing these plans it is important to understand that the key man insurance needs to be attributed to either a revenue purpose of a capital purpose. Revenue purposes include replacing lost income and compensating for any lost profits. Capital purposes include repaying debts and compensating the loss over goodwill with clients due to the absence of the key person.
  • Depending on the cover you have purchased and depending on the benefits offered along with the terms of the insurer, you will receive a large part of the cover amount from the insurer when you file a successful claim. The amount you receive can be used for a variety of purposes and this amount can prevent your company from being forced to claim bankruptcy or from letting go of other employees just to keep afloat. Insurers have paid billions of Australian dollars towards claims for key man insurance till date and by choosing a reputable insurer who has a history of making claim payments on time, you can ensure that your business continues to thrive even when you lose one or more key employees due to unforseen and unstoppable situations.


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