Key Man Insurance Explained

Key man insurance is a type of life insurance that businesses can purchase to protect themselves against financial loss resulting from the death or disability of a key employee. Key employees are individuals who play a vital role in a company’s operations, such as a CEO or top salesperson. The purpose of key man insurance is to cover expenses such as recruiting and training a replacement, lost revenue, and outstanding business debts in the event of a key employee’s death or disability.

Small businesses are often reliant on one or two key individuals, and the loss of one through death or disability can place significant financial pressure on the company. Key person insurance can help to ease this financial pressure by providing a lump sum death benefit or a portion of the employee’s salary to cover the costs of replacement.

It’s also important to note that if key individuals have signed surety on credit facilities, their estate is at risk if they die, as the bank may call up the facility. In this case, it’s sensible for the directors to insist on surety cover in the event of their death to cover their liability.

The premiums for key man insurance are typically paid by the business, and the death benefit is typically paid to the business. However, it’s important to structure the policy correctly at the outset, as there are tax implications and capital gains tax and estate duty implications. It’s also important to consult with a financial advisor to make sure the policy is structured correctly on a case-by-case basis.

Another type of insurance that is related to key man insurance is buy-and-sell insurance, which serves a different purpose. Buy-and-sell insurance is used to ensure business continuity in the event of the death or disability of a shareholder. It enables existing shareholders to purchase the interest of a deceased or disabled shareholder at a fair value, ensuring business continuity. This type of insurance also needs to be structured correctly at the outset, and the appropriate level of cover needs to be calculated based on the shareholding percentages and the valuation of the business.

Please visit IHS to learn more about keyman insuarance policy

This article was first published at https://topclickblogs.co.za/key-man-insurance-explained/

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