Key Person Protection

Disclaimer
This Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against the loss of income.
For impartial information about insurance, please visit the Money Advice service website at www.moneyadviceservice.org.uk

What are keyman insurance personal guarantees?

Keyman insurance personal guarantees are insurance policies taken out by companies when they borrow money to finance start-up or expansion costs. With these policies, the lender is named beneficiary. Lenders often require these policies from small or new businesses so that if a key person were to die (Some such policies include critical illness coverage as well.) the lender would still be covered for any potential losses on the loan. These policies are separate from policies that businesses purchase with themselves as beneficiaries in the event of the death or critical illness of a key employee. Policies with the business as beneficiary can use money from claims to keep the business going after a key employee dies or becomes critically ill. Money can be used to meet expenses, to hire and train a replacement, or to buy back company shares from the key person’s estate. Business owners are rapidly starting to realize that keyman coverage is a smart investment. Ideally, a company should have keyman coverage in the event of death, disability, or critical illness, but as a start, keyman life insurance is a good way for small or new businesses to prevent one form of financial catastrophe.

Can keyman insurance be used to hire temporary staff?

Yes. The proceeds from a keyman insurance policy can be used in any number of ways. If a key staff member were to become seriously ill and the company made a claim against their keyman critical insurance policy, and the claim was approved, any proceeds could be used to hire a temporary worker to take the place of the ill person. This is also the case when a key person dies. It may be necessary to hire a temporary worker while a permanent replacement is recruited, and hired, and proceeds from a keyman life insurance policy may be used for this reason. Proceeds may be used to cover short term cash flow problems associated with the death. Or they may be used to buy back any shares in the company that the deceased employee owned. If a keyman insurance policy is expected to be used to buy back company stock, it is important that the value of the policy changes along with the value of the stock so the company doesn’t find itself coming up short in the event of that employee’s death.

Who are the “key personnel” covered in keyman policies?

There is no hard and fast rule as to who is considered key personnel. The most obvious of these would probably be the partners and founders of the business. If three partners owned equal shares of the company, the loss of one of those partners could be catastrophic. Other executives may be considered key personnel if they bring in a lot of business every year. In some cases, key personnel may include non-executive staff. For example, a technical or pharmaceutical firm may have a scientist on staff whose particular education and experience would be very difficult to replace. He or she would likely be considered as a key person. It is possible that a long-term administrative professional could be considered a key person if he or she provided invaluable networking or knowledge that required years to amass. Partners must ask themselves whose skills and contacts would be most difficult to replace. Whose loss would potentially take away top clients? Who owns significant shares of company stock? The definitions of “key personnel” will differ for different businesses.

Disclaimer
This Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against the loss of income.
For impartial information about insurance, please visit the Money Advice service website at www.moneyadviceservice.org.uk
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