Key Man Insurance for Business

Key man insurance (nowadays often referred to as key person or combined to keyman insurance) is a popular type of coverage in business. These policies have no legal definition, but is best described as a plan which covers businesses, should important persons within that business suddenly die, become ill or incapacitated. The business would then be compensated for losses that arose from this situation.

The business would be covered for the period during which the specified person(s) were of use to the business and no longer and serves only to provide continuity to a business in a time of crisis not by granting indemnity, but by paying a fixed amount of compensation as agreed on the policy. The same underwriting processes apply with key man insurance as with other insurance applications, for instance policies for smokers may be at a higher premium as compared to those that don't smoke.

Who all are insured in the policy?

This type of plan is not just reserved for company owners, directors and CEO’s but is applicable to any person(s) who have significant value to a business and upon whom the company may rely financially, or whose knowledge or contributions are central to the running of the business. The idea is to compensate for the extra costs involved in hiring new staff, extra training, etc, and to cover losses such as decreased output and loss of transactions when the central man (or woman) is taken out of the equation.

Categories of Insurable Loss

Key person policies will compensate under four separate circumstances or categories of loss:

• Those related to a period of extended leave, whereby it is necessary to employ replacement staff on a temporary basis, and then train them to a workable standard.
• Protection of profits. Compensating for lost sales, incomplete projects, cancellations, delayed expansion and a loss of accrued specialist skills and knowhow.
• Insurance to protect affiliated individuals and institutions such as stockholders and partners. This is usually designed to allow these affiliates to purchase partnership interests.
• To insure as a guarantee against company loans or other banking facilities. The amount of cover will normally be equal to the value of the loan.

What are the limitations?

Provided the individual has a direct involvement as an associate of the company and will create a financial burden upon the company in the event of their loss, then they will qualify as case for key man insurance. This person may well be the company director, one of the partners, head of company sales, or anybody whose skills are of high importance to the running and progress of that business.