Have you heard about key man insurance?

18 May, 2016

As a small business owner, I’m well aware of what’s considered to be ‘necessary’ business insurance. But there’s one area of business insurance that doesn’t attract nearly enough attention – and in a country where SME sustainability is so high on the agenda, it puzzles me.

Most of my SME-owning colleagues offer their clients services. So aside from buildings and office equipment (and in some instances some kind of personal life cover) they regard themselves as well-protected against the risk of an unexpected event. But when I’ve asked if they have key man insurance, I’m met with expressions of surprise and the inevitable question – ‘key what?’

What it is
In a nutshell, key man insurance is a form of protection that mitigates your risk of losing a key member of the team, including yourself. If you’ve ever worked in a large corporate, you’ll have come across insurance that covers certain employees, or policies that require senior managers and executives to never travel on the same plane.

A smaller company doesn’t always have the luxury of headcount to plug skills and expertise gaps. And in SMEs operating as partnerships or with small teams, there’s pressure on the business to generate revenue with just a few individuals. The loss of just one member of such a team or business partner can lead to a shutdown or business standstill, and result in disastrous consequences for the heirs of a partner.

Why it’s important
Key man cover is particularly worth considering for small to mid-sized businesses of this nature. An employer once told me ‘no one’s irreplaceable’ – a sentiment which may be a necessary bottom-line way of thinking, but omits considerations like the cost of replacing essential skills or upskilling a newcomer to the business.

Key man insurance comes in various forms, but broadly speaking, you’ll find options that protect against key individuals dying or becoming debilitatingly ill or disabled. There’s also allowance for company debt to be settled in the event of death, or fund recruiting and training a suitable replacement. This extends to covering projects that can’t be completed because of the loss of a key individual.

What to look out for
Key man insurance is also referred to as ‘key person’ insurance, and in some instances, a product provider might spell it as one word. The term is used quite loosely, so it can be confused with what’s called a Buy and Sell Agreement, Debt Protection or Revenue Protection. They’re not the same thing, although they’re frequently offered as complementary safeguards.

Premiums and payout amounts vary depending on the company financials, so there’ll be questions related to numbers. Premiums are paid by the business, and it’s important to ask your advisor about tax implications. As always with money-related decisions – only take advice from an officially recognised financial services provider.