Who do you think in your organization is that kind of an employee whose knowledge, work and overall contribution to your organization you consider to be outstandingly valuable? If you have 1 or a few names already, then these are your key men. What if your business is to suffer a financial loss due to the death or the inability of the key man t work for an extended period? Key man insurance helps compensate for such a loss.

Key people in an organization can be those who:

• Help drive your business and give it a direction


• With their efforts help give your organization the ideal sales figures and the profits that you may otherwise have lost.


• Are at levels like directors, owners, partners, senior managers, managers in technical development, operations managers and similar such individuals.

The losses that are predicted in key man insurance may be put into 4 distinct categories:

1. A loss that may occur due to the inability of a key man to work for an extended period. This will provide temporary personnel to replace the keyman and also maybe finance recruitment as well as training of the replacement.


2. Loss of profits that would otherwise have come from sales. Losses that would incur from delay or cancellation of any project involving the key man. Loss also means loss of specialized skills.


3. Loss of partnership interest or shareholders interest. Protection of this loss ensures that existing shareholders or partners should purchase the shareholding or partnership interest.


4. Loss arising from any fault by anyone involved in guaranteeing loans for business or banking facilities.

When you are insuring your key man you should consider:

• What effect the loss of the key man would have in the profit figures of your organization?


• What would be the cost of recruiting as well as training a replacement of the key man?


• What are the loans that could be recalled on the key man’s death or disability?

When the insurance companies take to insure the key man in your organization, there are few factors that determine the premiums that they charge. The premiums are based on:

• Salary: Multiples of the key person's salary (usually between 5 and 10 times) is taken into account. Although this gives a straightforward means to work out the premium, it may not reflect the true value of the individual to your business.


• Profits: The proportion of profits i.e. the annual profits, the key person's salary and the time it would take to replace these are taken into account here.


• Term: The time for which the key man insurance is to be taken.


• Tax Position: There is no legislation regarding taxation of key man insurance. However, what is considered is that whether the premiums will qualify for tax relief. If there may be some amount of shareholding by the key person, then tax relief on the premium may be unlikely.

Here are 5 reasons why you should purchase key man insurance.

• The business that you run is a professional one and the key employees are such that they cannot be replaced easily due to legal or ethical limits.


• Your business would not be able to continue for long without that particular individual you have lost.



• Continuity in business is important. If you have partners, see how much they understand your business. Take care to find out how your family understands your business. Someone may inherit your partner's share of the business and not know much about it. Food for thought.


• Scope for suture growth and financing will be considered by insurers as an important factor. If there is scope for growth in the future, key man insurance may be purchased.



• The age of the key persons is between 30 and 55 years. Disability may be more probable than death, hence key man insurance may be considered to keep a check on the losses that may occur because of the inability to work of that particular individual that might incur losses.

Running an organization successfully requires the cumulative effort of the employees and there are some employees who become indispensable. These key men of the organization need to be insured as they are the ones who help take your organization to a direction. Key man insurance is an important aspect when you want to insure your business to run in an organized manner.