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Keyman insurance: An introduction
Page Summary:

Keyman insurance falls under the umbrella of Business Protection Insurance.

Find out on this page what it is and how it works, as well as its advantages and disadvantages.

What is it

Keyman insurance, which comes under the umbrella of business protection insurance, is a policy designed to pay out an agreed cash sum if a key employee suddenly stops work due to death or a critical illness.

If the policy pays out the proceeds go directly to the company and not to the individual, which is how it differs from a Life or Critical Illness policy. The sum insured is normally larger as well often running to hundreds of thousands of pounds if not more.

For many companies Key Man insurance is a critical component of their business plan, as running a successful and forward thinking business is as much about planning for the future as it is handling the day-to-day operations.

What can the money be used for

Depending on what type of Keyman policy was taken out (see below for more details) the money can be used for a myriad of purposes, including -

  • An injection of cash - Enables the company to buy time plus offer financial reassurance
  • Shore up profits - Chances are a key person is directly responsible for some of the profits
  • Cover the cost of temporary staff - Staff costs aren't cheap especially emergency ones
  • Recruitment - The cost of recruiting senior personal can be extremely costly
  • Repay company debt or an overdraft - Offers peace of mind, especially to your bankers
  • Buy the deceased person's shares - Important as a significant shareholding can fall into the wrong hands
Tangible assets are insured. Why not people - they're often more important

Most businesses insure their tangible assets but not their most important asset - their employees. And the majority of tangible assets can easily be replaced, for example -

  • New stock can be bought
  • Offices rebuilt
  • New cars and lorries purchased etc

But people, or at least key people, can't be replaced quickly.

Who is a 'Keyman'

A Keyman is anyone who plays a key role in the company and especially those directly related to profit generation. People such as -

  • Executive Chairman, Managing Directors, CEOs
  • Head of sales and marketing
  • Any one who is a significant revenue generator
  • IT and Finance directors
  • The head of product development who also plays a major role in the company's overall innovation
  • Basically anyone that's important to the company and plays a leading role
The 3 types of Keyman Insurance
As indicated in the introduction, Keyman insurance falls under the main insurance umbrella of Business Protection. And there are 3 main types of policies which are discussed in more detail via the links below -
  1. Profit protection - Pays out a cash sum to help shore up profits. The money can also be used for training and recruitment purposes

  2. Corporate loan and overdraft protection - Pays out a cash sum for the specific purpose of repaying company debt. Very useful if the directors have personal guarantees or second mortgages in place

  3. Ownership Protection - Pays out a cash sum to be used to buy out the deceased (or critically ill) director's or partner's shareholding
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