Wednesday, February 9, 2011

Key Man (Key Person) Insurance for Businesses – is it really a necessity?

Industry Insider: Malcolm Jones 

Hi Malcolm, as a financial advisor, how long have you been dealing with Key Man and other life Insurances?

I started back in 1968 and still going – so it’s been quite a long time.

Amazing that’s nearly 43 years, has Key Man insurance been around since you started, or is it a relatively new insurance?

No, it’s not new. Key Man Insurance has been around since I started, but it was never as popular or as important as it has become today. It’s also become known as Key Person insurance, a relatively new term reflecting the changes in the modern workplace, where many more women are now holding Key positions within businesses.

Why do you think it’s become more important today?

Put simply, businesses are carrying more debt these days than they ever have in the past, and this has left them more exposed than ever.  The problem isn’t the debt itself - it’s actually that a lot of it is guaranteed by a key person in the business, generally a shareholder who is independently wealthy. If this person were to die, then the loans guaranteed by them become immediately payable, in full and in cash, as the security is no longer there.
Key Man insurance provides that cash up front to Cover expenses such as these; this is the reason many banks will request a Key Man policy as a requirement of loan approval. On these policies, the bank is actually noted as a beneficiary.

So, what is Key Man (Key Person) Insurance, and what does it cover for?

Key Man insurance is a life insurance policy owned by a corporation, and taken out on an employee. In the event of a claim - the beneficiary is the corporation.

A Key Man policy covers the corporation against financial losses arising due to the death or permanent disablement of the key person.

These losses can be substantial and quite varied, and include things like:
  • the costs of purchasing shares from the deceased estate to maintain control of the business
  • paying corporate recruitment & training fees, plus a starting bonus and/or salary packaging which may be required to entice a similarly skilled person into the position.
  • paying out or refinancing loans guaranteed by the deceased
  • meeting business expenses and maintaining business value whilst undergoing this transition
Though the beneficiary on the policy is the corporation itself, Key Person policies also benefit a surviving spouse or other beneficiaries of the deceased estate, this is because they help to ensure that the equity value of any shares held in the business remain unchanged from their previous values, (prior to the key persons death or permanent disablement). This means that the value of the deceased estate is not diminished.

Does a Key Person have to be a shareholder?

No they don’t. A key person is anyone the corporation feels would cause it to suffer a substantial financial loss should they die or become permanently disabled.

This can be a shareholder or course, but it could also be a mid level manager with important contacts and personal relationships, or highly skilled employees like scientists, programmers or engineers working on business critical projects.

 Where can I go to find more information?

To find out more about Key Man Insurance, simply contact me (Malcolm Jones) on 02 8814 7777 or 0409 603 121.

Important Note: The above information is to be used as a guide only. For more detailed information please contact Malcolm Jones at Coverforce on 02 8814 7777 or 0409 603 121 or refer to your PDS (Product Disclosure Statement).

Malcolm Jones - Financial Advisor is an Authorised representative of AAA Financial Intelligence Ltd AFSL: 312478 ABN: 23 093 616 445 Representative number: 267643