What is a key man?
A company necessarily has one or more key men. It is a person who occupies an economic role essential to the proper functioning of the company because of the position occupied, its technical know-how, its managerial or commercial skills, or its responsibility. The leader, but also any employee who has a strategic place for the company, can be designated as a key man in the sense that he actively participates in the successful operation of the business.
For example, it can be a star chef in a Palace, an associate lawyer, a nose in a perfumer, a great Couturier, a very efficient salesman, a researcher in a laboratory, etc. It goes without saying that its prolonged absence, or even its definitive departure, can endanger the continuity of the structure as a whole.
Who can buy a keyman insurance?
The keyman insurance is aimed at all companies, multinationals and SMEs. They remain free to identify the key men, and to sign the contract with the insurance company of their choice. It is like a term life insurance but in that case, beneficiary is a legal entity. It can include as well a critical illness policy.
Pay attention, however, as some insurers set a maximum age, usually between 55 and 65 years. Beyond that, a key man will not be able to be protected by this professional insurance.
Why buying key-man insurance?
The keyman insurance covers the risk of financial loss arising from the death or the total and irreversible loss of autonomy of the insured. As an option, it can cover critical illness or temporary incapacity for work, which is at least three months, but also disability of the key man who occurred as a result of an accident or illness.
Temporary or definitive disability, or the death of the key man, could have a significant impact on the future of the company. Thus, the key-man insurance compensates for the loss of exploitation of a company. This is intended to guarantee the continuation of the activity of the company in question.
To do so, the payment of lump sum is foreseen in order to compensate for the absence of this person indispensable to the survival of the company, which avoids in such a way to end up in a financial impasse. Keyman insurance will deliver the necessary cash needed for business to recruit another manager and handle temporary loss of profit in consequence of the situation. Thanks to the key-man insurance, it is the guarantee to keep its brand image intact and, therefore, to maintain the trust of customers and investors!
Before signing the contract, the company must investigate its needs in the event of a loss and examine the shortfall without forgetting any contingency. In particular, it may be that the sudden departure of the key man will require to recruit a replacement or train staff, and thus pay an additional salary or training. Probably should ask for one or more bank loans, provide costs related to the reorganization of the structure, and even expect a decrease in productivity accompanied by slowing pace of orders, etc. At the end of the day, the turnover would inevitably be impacted and the cessation of activity becomes highly probable.
This reflection will then allow the company to determine the guarantees adapted to its own situation and have a precise idea of the amount of capital to be insured, which varies considerably from one case to another.
The cost of man-key insurance
The amount of the indemnity is calculated on the basis of the loss of operation suffered. To make a fair estimate, the entrepreneur must assess the loss of gross margin as a result of the absence of the key man and therefore the decline in turnover. This step is fundamental and requires external assistance such as a chartered accountant or a specialist Advisor. Indeed, it is up to the company to define the most appropriate level of guarantees and therefore the rate of contributions. Indemnity is fixed at a flat rate: if a company want to be covered for USD 1 million, it will receive this sum in case of death or invalidity of the key man.
Rate will varies according to age of insured as well as lifestyle: for establishing the insurance tariff, the distinction between smokers and non-smokers is of great importance, as well as the practice of extreme sports, Etc. Therefore, the key man will have to submit to a medical questionnaire except if the amount of capital to be insured is relatively low.
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