Keyman or key person insurance provides financial protection for your business against the loss of a key employee in the event that a key employee dies or becomes disabled. The business owns the policy and pays the premiums. At the claims stage, proceeds are paid to the company.
There is no hard-and-fast rule as to who a key person is, but it is someone who adds significant value to the business either in terms of performance, functionality or profitability.
It could be the owner or anyone else with specialised knowledge or skills, such as a top-tier chef in a popular restaurant, or someone who has important relationships with suppliers or clients.
To identify the key person or people in your business, consider whether any of the following would apply if someone working in the business disappeared:
You may want to insure a key person against death, disability, or illness, or some combination of these. There are no hard-and-fast rules around what type of cover you should have in place, but you can be led by the industry and the role of the keyman or key person.
For example, if a senior member of an auditing firm loses the use of one of her legs, she will most likely be able to return to work. Insuring against her death will be more significant. Read more: What is life cover?
On the other hand, a key person in a construction business with the same disability may not be able to return to work due to the physical nature of the job. The impact on the business could be severe, so disability cover, as well as life cover, should be in place. Read more: What is disability cover?
Financial advice plays a key role in deciding who to cover and what type of cover to have in place. Read more: How can I find a good financial adviser?
Ideally, you should determine how much value the employee adds to your bottom line and base the amount of cover on this. It may be difficult to determine, but consider the following aspects:
Calculating the rand amount will give you some idea of the cover that is needed.
Keyman or key person insurance does not cover the loss of skills or expertise due to resignation 
or retirement.
You can generally only insure employees and not independent contractors, even if contractors add significant value to your business.
You might be able to insure an independent contractor if you can show some insurable interest, which is not that easy to do.
If an employee retires or resigns, the business can choose to cancel the policy or continue paying the premiums and claiming when the time comes. There is no requirement for the business to have an insurable interest at the claims stage, only at the start of the policy.
When taking out key person insurance, the business must consider the tax treatment of the policy and clearly indicate on the application form how it would like the policy to be treated.
There are two options:
It is normally much easier to choose not to deduct the premiums from taxable income because you will not know what the tax rates will be when the proceeds are paid out. You also won’t have to increase the cover to cater for the extra tax.
It’s critical to get the tax structure right at the outset, and each case needs to be structured based on the specific business needs. An experienced and qualified financial adviser will be able to provide you with advice.
The proceeds of life insurance policies are deemed assets in your estate.
In terms of the Estate Duty Act, the proceeds of a key person insurance policy are exempt from estate duty as long as all of the following conditions are met:
If the proceeds are subject to estate duty, the executor of the deceased estate can reclaim the estate duty from the business as it is the beneficiary of the policy. Read more: What is estate duty?
