Four categories of coverage
Key person insurance, also commonly called key man insurance, is an insurance policy taken out by a business to compensate the business for financial losses that would arise from the death or extended incapacity of an important member of the business. A key person can be anyone directly associated with the business whose loss can cause financial strain to the business. 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 who is especially valuable to the company.
The key man Insurance policy is not a special type of insurance policy. It is just a standard life insurance, TPD insurance or trauma insurance policy that is used for business succession or business protection purposes. Normally the policy is only in place while the key person is critical to the business.
There are four categories of loss for which key person insurance can provide compensation:
- Losses related to the extended period 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 profits. For example, offsetting lost income from lost sales, losses on cancellation of any business project, and loss of specialised skills or knowledge.
- 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.
The tax deductibility of insurance cover depends on whether it is for revenue (e.g. reduced profits, recruitment/training costs) or capital purposes (e.g. loss of goodwill, buy/sell).