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What is Key Man Insurance?

 

Insurance is a very large area and many areas are covered under it purview. One of its branches or one of the insurances that are taken out by companies is the Key Man Insurance.  To understand its relevance in business, you will need to know what it means. There are a many people who are responsible for a business to be successful. In most cases, there will be one important or key person who makes all the critical business decisions. Losing this person will mean a huge loss to the business. While it may be impossible to equate the loss in money terms, a certain amount is paid if such person is incapacitated or passes away.  The employer typically takes out an insurance to off-set costs incurring from maybe hiring a temporary help, looking for a replacement, training the recruit with the unique skills required and so on.The amount is generally what has been agreed to as the insured amount.


The insurance that is so taken will not extend beyond the usefulness of that person. Such an insurance is taken to compensate the business for the loss of the income generator and to keep the business working.


Who qualifies as a Key Man?


Any business has that one valuable person who generates the maximum revenue with his/her unique skill set. For instance, intellectual property is very difficult to replicate or quantify for that matter.  In such cases, the employer may take out a key man insurance policy or an insurance policy on the health of a person whose work or contribution to the company is unique. If we were defining a key person “any person whose experience, skill, knowledge and leadership is critical to the success of a business. The loss of this person will cause a huge financial strain on the business”. Examples of a key person can be a Director, Chief Financial Analyst, IT Heads  and not limited to this alone.


How do we know how much the person is worth?


The worth of the person completely depends on the value the business attributes to the person’s skill. If the person is a partner in a business, it might mean the amount of contribution he has brought into the business. So, the amount will basically cover a loan or an investment. This amount will almost always include the loss in terms of hiring a replacement or the money value of knowledge of the person. Essentially it will vary with the business and the importance of the person in it key man cover .


Who gets the insurance money?


It is the business that is insuring against the loss of a valuable person in the business. So, ideally the money should go back into the business. However, having said that there are many ways in which this can be treated. There is a no legislation about it and hence the business decides who the money goes to. Sometimes, there are scenarios where the money is owed to a person(s) in the business and that is what is contracted. There are no insurance requirements for it to be paid out to an entity or a person. In this case, typically businesses tend to look at taxation benefits, policy continuation requirements. Once they come to an agreement about what works best for the business, they commit to it.

 

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Also, inquire about the taxation laws that will apply to your company.

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