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Key man insurance, who do you need to insure?

The most valuable asset for any business is the key people who run it. Loss of staff with essential skills or years of knowledge can impact revenue, profit, goodwill and ultimately the value of the business. Key man insurance compensates for financial losses should the unexpected arise and having adequate insurance in place is an important part of succession planning.

What is key man insurance?
Key man insurance is simply a Life Insurance, TPD Insurance or Trauma Insurance policy taken out on the key person (or people) in a business. When taking out key man insurance the purpose of the policy must be attributed to either:

Revenue protection - replacing lost income and compensating for lost profits
and/or
Capital protection - repaying debts and covering expenses such as recruitment and training.

Who can be a key person?
A key person is anyone directly associated with the business whose loss could result in financial strain. This might include a Director of a company, a key sales person or someone with skills or knowledge specific to the business. To determine who needs key man insurance start by looking at which of your staff are irreplaceable in the short-term.

Tax considerations of key man insurance
On top of the reassurance of knowing your business is adequately protected, key man insurance also brings with it tax benefits. If the main purpose of the key man insurance policy is revenue, the premium is tax deductible. However if the business takes out key man insurance for capital purposes or in the case of dual-purpose policies (part revenue/part capital) the premium is not tax deductible.

How much key man insurance do you need?
Determining how much cover you need depends on the nature of your business and the role of the key person. You will need to consider how much of your business profits can be attributed to a individual, whether they will need to be replaced by another employee and what recruitment and training costs you may incur. Once you have estimated the value of losing that key person, you will then be able determine what level of cover you require. If you need help with key man insurance requirements for your business, YML Financial Planning can work with you and your accounting and legal advisors to plan and set up your insurances.

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