Our Working Hours
Mon - Sat: 8.00 - 18.00
Key Man Insurance What Is It and How Does It Work?
Key Man Insurance
Key man insurance refers to the life or disability insurance that a company carries on its key personnel. The insurance plan pays the business to assist in replacing the key individual if they pass away or become disabled.
SOUTH African companies whose revenue is based on a single person’s expertise, performance, or personal network can benefit from key person insurance. However, if you work in a sector where workers have more diversified skill sets, you probably don’t need this type of business insurance.
What is the purpose of key Man insurance?
Key Man Insurance is designed to assist small South African businesses in maintaining their stability in the event that an owner or key employee passes away or becomes disabled. Key person insurance on the management team of a company is frequently required by investors and lenders.
Key Man in your company may include the owner and those who:
- Possess industry knowledge or highly specific technical knowledge.
- Having a solid reputation in your field or community is essential for commercial success.
- Are in charge of generating a sizable amount of revenue that will take some time to replace.
When there is no key employee in your company, key person insurance might still be utilised. For instance, in a small business partnership, partners can buy out the interests of outgoing members by purchasing key man insurance.
What key Man insurance covers
Employees’ disabilities or deaths are covered by key person insurance. You can cancel your policy or transfer it to the insured if that person leaves the company for any other reason. The insured can then modify the policy to suit their own needs and begin paying the premiums.
For businesses, the proceeds from key man insurance can be put toward any of the following:
- Covering operating expenses until you find a replacement hire.
- Training the replacement hire.
- Offsetting lost income.
- Purchasing a former owner’s ownership interest in the business. (You should also have a buy-sell agreement if you plan to use key man insurance for this purpose.)
Key man insurance proceeds can also be used to pay off debts, distribute money to investors, pay severance to staff, and generally wind down the business if you decide it’s better to dissolve the company.
Buying a key man insurance coverage might help your business in various ways in addition to the economic benefits of the policy. For instance, you might be able to borrow money against the cash value of your policy or withdraw money from it, however doing so will lower the death benefit.
Types of key man insurance
The category of life and disability insurance includes key person insurance. You can acquire the following insurance policies while looking for key man insurance:
Term life key man insurance
The most well-liked and cost-effective type of life insurance is term. Similar to vehicle insurance or homeowner’s insurance, term life insurance premiums are paid monthly or annually, and you are protected if the insured dies at any moment during the policy’s term. Typically, term life insurance can be purchased for up to 35 years, and you can renew the policy when it expires.
Whole life key man insurance
There is no expiration date for whole life insurance, often known as permanent life insurance. As long as you continue to make premium payments, the insurance is still in effect. Although whole life insurance costs more than term insurance, your premium payments are deposited into a savings account. As a result, the policy accrues cash value that can be accessed for withdrawal or borrowing.
Variable life key man insurance
Because the policy remains in force as long as payments are paid, variable life insurance is comparable to whole life insurance. The distinction is that, as opposed to a savings account, the premiums are deposited into investing accounts. A changeable policy might be risky since investments can lose value unexpectedly in response to highs and lows in the market.
Disability key man insurance
South African’s key man insurance policy can include a disability insurance component as well. If the insured encounters a disability that prohibits them from carrying out their job tasks, the insurer will pay a benefit, which is typically 40% to 70% of the key employee’s compensation, according to the Insurance Information Institute.
Cost of key man insurance
Each of your key employees will require a separate key person policy, which you must obtain. Your ability to afford each will be determined by:
- The age, gender, and physical health of the insured. (Insurers might require the insured to take an exam before issuing the policy.)
- The insured’s occupation and industry.
- The insured’s total compensation.
- The amount of coverage your business needs.
How much key person insurance coverage do you need?
Think about the following to help guarantee that you’re neither under- or over-covered:
Cost of replace: Total the expenses related to locating, hiring, and training a replacement for the insured business owner or employee. Include any lost revenue from your firm during this period as well.
Contribution to earnings: Divide the covered person’s revenue or profit by the number of years it will take your company to replace those earnings. While more established organizations should consider profit, newer enterprises can use revenue statistics.
Multiple of compensation: If you use performance-based pay, double the important employee’s salary by the number of years it will take your company to fully recoup from their loss. For example, it could take a young attorney five years to become as competent as a partner leaving the business.
Where to buy key man insurance
Since key man insurance is a somewhat specialized sort of insurance, established insurance companies typically sell it rather than startups that specialize in online business insurance sales. To acquire coverage, you might need to speak with an insurance broker.
You can discover the greatest coverage for your company at the best price by comparing quotes from several providers.
Frequently Asked Questions (FAQs)
A keyman insurance policy is one in which the employer is both the proposer and the premium payer, the life to be insured is that of the employee, and the benefit, in the event of a claim, is paid to the employer.
Key man insurance protects businesses against the loss of profits if an employee becomes terminally or critically ill, or dies. The money can be used to find a replacement. Key person insurance can help keep the business trading.
A key man has special responsibilities for supporting a specific group of children and building relationships with them and their families.