Keyman Insurance by Phenyo C. Aniku

Keyman insurance is a life insurance cover taken up by a company on the life or health of an employee who has skills or expertise that cannot be easily replaced or a shareholder who has invested heavily into an enterprise. The cover is taken up by the business to minimise its financial loss caused by the absence of the key person. This means that the premiums will be paid for by the business. The insurance cover usually covers death, permanent disability or temporary disability of the key person away from work. The cover is taken up where a key person’s absence will:

• Have an great negative impact on the profits of a company
• Be difficult to fill
• Will cost a lot in replacement or training of a new person

The cover can also be taken up on the following arrangements been sole proprietorship, partnership or other forms of business. In this way the cover will be protecting the capital investments of the persons involved.

The cover is not an indemnity but a compensation cover. This means that the insurance pays out a fixed amount, not determined by the actual loss to the business. However, the role of the key person must be established in monetary value. Usually the compensation value limit is calculated as four times or five terms the annual total salary of the person, which is similar to a workman’s compensation cover against death. Other costs that may be incurred in replacing such a person also need to be taken into consideration.

The proceeds of the cover will be directed to the business when cover is taken up by the business. There are also instances where the proceeds will be directed to the key person, this depends on the terms and conditions agreed when the cover was arranged.

There are tax provisions which need careful considerations when taking up the cover. Therefore there is a need for the prospective buyer to be notified of applicable options on the premium tax deduction options by the investment planner arranging the cover.

Some Benefits of Keyman Insurance:

• It can be used by the business to acquire loans as a guarantee
• It can also be used to retain key persons within the enterprise
• It is used to minimise losses to the business caused by the death of the key person

The keyman insurance cover has similarities with some already existing covers like life insurance cover, workman’s compensation cover, personal accident cover but not entirely the same. The cover is unusual in the local market but represents an opportunity for a new range of product to life insurance companies to research further on and develop for our market.