Keyman Assurance
Keyperson assurance, also known as keyman assurance, is an important form of business insurance. It is an insurance protection taken out by a business to compensate that business for financial losses that would arise from the death or permanent disability of the member of the business specified on the policy.
The aim is to compensate the business for losses and facilitate business continuity. Key person assurance compensates with a fixed monetary sum as specified on the insurance policy, which may run for a fixed term and/or up to retirement age.
A keyperson can be anyone directly associated with the business whose loss can cause financial strain to the business, and has a bearing to its survival and to its profitability. For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company.
An employer, a sole proprietorship and/or a partnership may take out a keyperson life assurance cover on the life or health of any employee/owner/partner whose knowledge, work, or overall contribution is considered uniquely valuable to the business. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.
Insurable Losses (Keyperson )
There are four insurable losses for which Keyperson insurance can provide compensation:
Losses related to the duration / permanence of disability - when a key person is unable to work, to provide temporary personnel and, if necessary to finance the recruitment and training of a replacement.
Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners.
Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.
Insurance to protect profits - for example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the keyperson was involved in, loss of opportunity to expand, loss of specialized skills or knowledge.
The sum assured is to be determined by the employer/partner, who may peg sum assured to:
Ten times three years salary and benefits; or
Five times net profits of the organization.
Advantages of Keyman Assurance
Advantages of taking Keyman Assurance are:
It generates confidence, sense of security and loyalty in the minds of the Keyman.
The organization is protected against the financial loss in the event of Keyman’s death.
It protects the interest of shareholders, employees and customers and keeps the company’s position stabilized in the market.
It can be given as a security to bankers; it is guarantee to the creditors.
