Key man insurance is simply life insurance on the key person in a business where the beneficiary is the company. In a small business, the key person is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business--the ones whose absence would sink the company. You need key man insurance on those people!
A venture capital/ private equity firm, which raises and manages funds needs key person insurances for its key personnel. The sudden death of a keyman or his unexpected exit from a fund triggers concerns over the ability of the other members in the senior managing team to take the firm’s investments ahead. One concern is the ability of the senior management team to keep the fund’s investment flow.
Unless somebody whom the fund participants trust with their money is hired, further investments can’t be made in a firm. The process to find the right guy may take a long time.
Do You Need Key Person Insurance?
To decide whether you need a key person insurance policy in your business, you will need to determine whether there are members of the team without whom your Company could not function or function at a considerably lower level, and then identify who those people are.
In some cases you will be required to take out key person insurance on those members of your team who are most important to the business before you can be approved for a business loan. In this instance you are showing your lender you have contingency plan in place to repay your debts even if the worst does happen because in paying the key person insurance premiums, your business lists the lender as a beneficiary. This allows the bank to collect on some, if not all, of their funds.
Who is a Key Person?
A key person must be directly associated with the business and his/her loss must be seen to cause financial difficulties for the business. This key person to insure could be the Director of the Company, a partner, a key salesperson, a project manager or anyone with skills or knowledge specific to the operation of the business, and of specific value. In some businesses, the entire management team may be integral and in this case a key person insurance policy can be purchased for each member of the team, or each owner in a business partnership. In many venture funded firms, where the funding has happened purely on the basis of the potential of the founders, the fund may insist on key person insurances. Even if they do not, it is a prudent business practice to do so. The key persons managing a PE/ VC fund should also be covered by the funds by a key person insurance.
How Much Key Person Insurance is enough?
When choosing an insurance amount, you should consider the size and financial situation of your business operations, and the impact that the loss of the key man is likely to have. You can take out key person insurance for Rs 100 Cr and while that may seem like an exorbitant amount, think about how much your business would realistically need to survive until a replacement is found and business gets back to the original levels. When choosing a cover amount it is important you strike a balance between what your business budget can afford now, and the amount you will need in case of a death in the company.
A general thumb rule to assess the key man insurance requirement is as follows –
• Rs 50 to 100 Cr for CXOs of large companies (Turnover over Rs 1,000 Cr)
• Rs 20-50 Cr for CXOs of medium sized companies (Turnover Rs 100 to 1,000 Cr)
• Rs 5-30 Cr for CXOs of small or nascent companies depending on the extent of funding and growth prospects
Note – The annual cost (premium) of key man insurance is likely to be 0.1% to 0.3%, depending on the age and health conditions of the key man. It’s a leverage (compensation/ cost) worth taking.
Also consider any additions you may want to include in your key person insurance policy including disability insurance to help a business manage if a key employee is lost for a short period of time while rehabilitating from an illness or injury.
When Should You Consider Key Person Insurance?
While key person insurance is not one of the compulsory forms of business insurance that owners must take out, it is a type of insurance that most businesses will still need if they want to protect their hard work, profits and future. A business will need key person insurance at any time that the loss of an owner, manager, key salesperson or other integral staff member, would result in a loss of essential knowledge about the business or clients, and in turn the loss of sales, profits, revenue and continuity.
Do you already have a key person Insurance?
Term insurance charges vary from insurer to insurer. If you have taken out key person insurances, you might want to review it. It’s highly probable that you will be able to save costs if you replace the previous insurances. This is because of the fact that term insurance rates have dramatically declined over the last few years.
The second reason for reviewing your insurance would be because of changed circumstances. It is always good to review your insurance cover every 3-4 years, and keyman insurance is no exception.
Call us for Key man insurance needs. We will guide you through the process and get you the best deals from reputed insurers.
For more information see the following link http://securenow.in/cxo-services/keyman-insurance.html