INSURANCE - 29.03.2010

Keyman insurance

No one is indispensable?

If you lost one of your co-directors without warning, how would your company fare without their input and expertise over the ensuing months? No business should bury its corporate head in the sand and hope that nothing bad happens to a key member of the company. Perhaps it wouldn’t cause a major problem, but there’s no point in ignoring the possibility until disaster strikes.

Tip. If you haven’t considered how your company would be affected in the event of losing a director or other key personnel don’t put it off any longer. Identify and assess the financial costs and problems of losing a key player in your organisation. Draw up a firm contingency plan to counter the anticipated problems.

Less obvious problems

It’s not all about losing the manpower of a key worker; that would be bad enough. If they are also a major shareholder, this could lead to loss of control of the company if their shares pass to one or more of their beneficiaries.

Tip. Consider a pre-emption clause in a shareholders’ agreement that says in the event of the their death the other shareholders, or the company, has the right to buy the deceased’s shares at their market value. Of course funding will have to be found.

Keyman solution

Whether it’s to pay off your former colleague’s beneficiaries or to plug a gap in the company’s finances caused by the sudden loss of their expertise, money will have to be found to do it. One solution is for the company to take out a keyman insurance policy (see The next step). This can provide a pay-out in the event of the director’s death. But it could also offer wider cover.

Flexible terms and conditions

In its most simple form a keyman policy is life insurance that pays a lump sum to help your company survive the financial impact of losing a key director or other employee. But it can also pay out in a number of other situations, such as permanent, temporary or partial disability of the person insured who is then unable to carry out their usual duties. The amount the policy would pay out is set at the time the policy commences. The greater this is, the higher the premium will be.

What’s not covered?

The policy won’t cover every eventuality and a number of general exclusions will apply. Typically, these include pre-existing medical conditions, pregnancy or childbirth, suicide or self-harm, the consequences of drugs and alcohol, and tropical diseases, unless properly inoculated. An upper age limit will also apply, typically 65 years of age.

How much?

The cost of Keyman cover depends on the health and age of those insured. For example, the likely premium for insuring a director aged 45 in a firm of financial consultants, with the sum insured being £100,000, would be between £850 and £1,000. Whether some peace of mind is worth the cost of the premium is down to you and your co-directors.

For further information on keyman insurance, visit http://companydirector.indicator.co.uk (CD 11.12.06).