Many employers focus a lot on how they can adequately protect their staff members in the workplace. Usually, this is in the form of some kind of life insurance or death in service plan, in order to help their families get by should anything happen to them.
However, some businesses also protect themselves against anything happening to their key members of staff. This is a common choice in small businesses, where there are just a small number of people that are crucial to the day to day running on the business.
Keyman insurance is an insurance product that companies can take out against their key members of staff, and it works in a similar way to life insurance. For more information on keyman insurance, how it works, and what is covered, read on for our keyman insurance guide and top tips.
What is keyman insurance?
A large number of businesses would not survive without their key members of staff, and if one of these key people were to pass away or fall critically ill, then it could cause the business to fail. Keyman insurance is essentially a life insurance policy that is purchased by a company on a key staff member’s life. The business will be the beneficiary for the plan and pay the monthly premiums, and if that key person in the company passes away, then the company will receive the insurance payout.
This payout is designed to help keep the business running after the death of a crucial member of the team. It can reduce the impact of lost profits, debt repayments and the cost of replacing a crucial staff member.
Keyman insurance is often also referred to as key person insurance, keywoman insurance and business life insurance.
How does keyman insurance work?
Keyman insurance works very similarly to life insurance policies, and the beneficiary will receive a lump sum payout in the event of the death of the person covered by the policy. Many businesses chose to take out keyman insurance on their most senior and crucial employees, often the directors or business owners.
If that person were then to pass away or become critically ill and unable to work, then the business would receive the payout.
The price of a keyman insurance policy is completely dependent on how long the insurance is taken out for (the term) and also the level of cover required. The payout amount is often calculated as either a multiple of the key person’s annual salary or how much profit they make for the company and how long it would take to recover.
Some businesses also choose to cover themselves for the direct cost of replacing that member of staff, including finding a new staff member, paying their salary and how long it might take to replace any lost revenue.
Keyman insurance should be considered for any employees that are crucial to the daily running and profitably of a company. If a business would struggle to operate if a member of staff was no longer around, then keyman insurance might be a worthwhile investment.
What does keyman insurance cover?
When a business chooses to take out keyman insurance on a crucial member of staff, they are covering the business should anything happen to that person. In the same way as a life insurance policy, keyman insurance will pay out if the person covered passes away.
Keyman insurance does not only cover for death, but some policies can also cover for critical illness and long term disability. This means if the key person can no longer work because of illness or disability, then the company will still receive the payout. It is also possible to get keyman income protection insurance, which will help to fund the salary and a temporary replacement for a key person who requires time off sick.
Many keyman insurance companies will have a list of predetermined illnesses that are covered, and also some exemptions of illnesses that are not eligible. It is important to properly check exactly what is covered by a keyman insurance policy before taking it out.
Some business loan providers might require a business to take out keyman insurance in order for them to be approved for the loan. This will give the lender reassurance that the keyman insurance can cover the loan repayment should anything happen to the key person in the business.