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Keyperson or ‘key-man’ Insurance as it is sometimes referred to, is a business-specific Life Insurance policy that is designed to protect your business when a key employee dies. Surprisingly, it can be overlooked by many businesses.
People are the most important asset in any company. Therefore, it is vital they are protected and plans are put in place.
Who is a Keyperson?
A Keyperson is anyone who the company depends on for continued success.
The role of the Keyperson will vary from company to company. From designing products to generating new business or having a specific skill set. Many companies are heavily reliant on certain individuals.
A loss of these key employees would cause financial heartache for the company.
The death of a Keyperson may also cause issues with regard to a particular skill set being lost along with reputational damage. In some cases, the Keyperson may also be the main point of contact for important relationships within the company.
What is Keyperson Insurance?
Keyperson insurance is a business-specific type of insurance that allows a company to be financially compensated following the death of a key employee.
In the event of a Keyperson dying, a lump sum will be paid to the company in a bid to compensate for losses that may occur because of this death.
It can be taken out on a key employee at any stage. The premiums are paid on a regular basis. The cost of the premium will vary depending on the level of cover required.
However, premiums are paid for by the company and therefore the company owns the policy.
Why is insuring key employees important?
Insuring key employees will have many benefits. In a time that will likely be emotionally stressful, Keyperson insurance may provide some welcomed relief.
Protection
Should a key employee die, the company will receive a lump sum payment. This will assist the business going forward.
Preservation
Many businesses struggle following the death of a key employee. Keyperson insurance is designed to help there be as little disruption as possible.
Commercial
In some cases, the Keyperson insurance payment may be used to clear bank loans secured by the Keyperson who has passed away.
Clarity
A major benefit of Keyperson insurance is knowing there will be plan structure in place following a death.
Recruitment
The benefit paid may assist in paying the costs associated with finding a replacement with the correct skillset.
Structure
In what will likely be an emotional time, having Keyperson insurance in place will allow the remaining staff to follow a pre-arranged framework.
Looking to know more about Keyperson Insurance?
We have broken it down in more detail in our guide below.
Editorial Staff
Last Update: August 2022
Overview
In many companies, there are a small number of employees who are vital to the continued success of the business.
Often these employees have a specific skill set that would be difficult to replace. These employees may also have some valuable contacts within the industry and play a major role in winning and retaining contracts.
Therefore, it is important that business owners protect the future of their business and put a plan in place. Keyperson Insurance may also help with the costs associated in finding a replacement for a key employee.
Important Health Statistics
The recent global pandemic has shown that none of us are invincible. The statistics regarding the likelihood of you becoming sick or dying are likely higher than you may think.
These statistics are particularly important when it comes to company owners/directors. Having a plan in place may be the difference between the business surviving or not.
The below table shows the percentage chance of a Keyperson within a company dying at age 65.
Number of Keypersons in the firm | Chance of dying before age 65 |
2 | 21% |
3 | 29% |
4 | 37% |
5 | 44% |
6 | 50% |
7 | 55% |
8 | 60% |
Table 1: Irish Health Statistics (CSO)
Risks of not having Keyperson Insurance in place
Not having a Keyperson policy in place for the relevant employees can have a severe impact on your company. Complications may include:
- Loss of profits.
- Potential repayment of bank loans/debts. In some cases, the deceased may have acted as a personal guarantor.
- Loss of the deceased contacts and future potential sales/contracts.
How is Keyperson Insurance treated for tax reasons?
Whilst emero specialise in financial advice, we are not tax advisors and in some situations it may be worth seeking advice from someone who specialises in this area.
Tax relief is available for Keyperson insurance. However, to qualify, there are four conditions that must be met:
- The relationship between the life cover and the person being insured must be employer and employee.
- The Keyperson must own less than a 15% shareholding in the company.
- The Keyperson policy is intended to help recuperate a loss of profits as a result of losing this key employee.
- The policy is a term assurance contract that does not exceed retirement age.
A company may be eligible for corporation tax relief on premiums should all the above conditions be satisfied.
There are other nuances associated with Keyperson insurance and how it is treated for tax reasons. To ensure you are aware of any potential tax liabilities, it is important to consult with your Financial Broker and your tax advisor. This will ensure that the correct structure is in place and no surprises will arise.
How much cover do I need?
Calculating how much cover you need should be done on the basis of estimating the financial implications of losing that key employee. It may be a loss of profits combined with the costs of attempting to recruit a replacement with similar knowledge and experience.
When taking out your policy initially, these calculations should be accounted for. There is no universal answer for calculating how much cover is required. However, using the below is a good starting point.
- Estimation of lost profits
It is likely that the Keyperson heavily contributed towards the company being profitable. Although, it is difficult in many cases to ascertain exactly how much impact one employee had.
In many cases, the cover needed may be calculated by using the key employee’s salary. Or, if the key employee is in a sales-based position, you could potentially use the value of their annual pipeline. Many companies look for cover equal to two times the profits the key employee is responsible for.
- Multiple of salary
In some cases, the cover needed will be calculated based on the key employee’s salary. A rule of thumb is ten times this individual’s salary.
- Loans or Debts
Some key employees may be involved in company loans as personal guarantors. This will need to be assessed when calculating the cover needed.
It may also cover loans the Keyperson has made to the company that is not covered by insurance policies. The amount of cover could be set to equal the amount of any borrowings to be repaid on the death of this individual.
In certain circumstances, a lender may require a company to take out a Keyperson policy following a commercial loan.
There will also be non-monetary costs to be considered. There will likely be disruption to the business that cannot be accounted for. Recruitment and training of a replacement is another cost that should be considered.
How to set up Keyperson Insurance?
Setting up a Keyperson insurance policy involves multiple steps. The company is deciding to take out a term assurance policy on a key employee.
Therefore, there will need to be a procedure followed and sign-off is needed. The process may be the following:
Step 1. Deciding on who is being insured
In most cases, this decision will be agreed upon at board level. It must be agreed that the death of this key employee would cause significant disruption and financial loss to the company.
Once agreed, the process can be continued.
Step 2. How much cover will be required
Once the board has decided on the employee being insured, the amount of cover needed must be calculated.
This can be calculated in a couple of different ways. The most common are:
- The estimated loss of profits – How much of the company’s profits is that key employee responsible for.
- Salary – Covering multiple of the key employee’s salaries. For example, 5-10 times the annual salary.
- Loans or Debts – Has this key employee been involved in any commercial loans on behalf of the company.
Step 3. Board Resolution
Once it is agreed who is being insured and what the cover needed will be, sign-off at board level is often required.
Step 4. Complete the application process
If there are multiple key employees being insured then there will need to be multiple applications submitted for each Keyperson.
In certain circumstances, additional information may be required. This may be in the form of additional information, medical examinations, or financial questionnaires.
Once all the insurer is satisfied with all the above, the Keyperson policy will be issued.
Other ways to protect your business
Keyperson insurance is not the only option for protecting your business. Choosing an option will depend on the circumstances surrounding that particular business.
Other options include:
Should you be unsure what policy may be most suitable to protect your business, it may be worth contacting our team.
Is there anything else to consider?
The role and duties of a Keyperson will differ depending on the company. However, what remains constant across companies is the importance of certain employees to the future of the business.
The higher number of key employees your business has, the greater the risk of something untoward happening to one of them. Not having a plan in place means the business could suffer severe financial consequences in the future.
There are several steps involved in setting up a Keyperson Insurance policy. At emero, we specialise in this area of advice and would be happy to answer any questions you may have.
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