Here are the 6 reasons why your business needs Keyman Insurance.
What is Keyman Insurance?
Every business has a few individuals who make a significant contribution to the growth and profitability of a business.
These are typically Owners, Partners, Directors, people with special skills or those who manage critical areas of a business.
Temporary or permanent loss of such indispensable people due to death, disability or critical illness can have a devastating impact on the revenue, profitability, goodwill and continuity of the business.
Keyman insurance is a life insurance policy taken by a business on the lives of such Key people to mitigate the financial loss arising due the death, disability or illness.
When It's Needed
Your company may need Keyman insurance if it largely depends on one or a few individuals to sustain and succeed.
For Eg: John and Peter are partners in a trading business (J&P Trading LLC).
John has an outgoing temperament and is enterprising, so he takes care of sales and marketing. Peter is soft-spoken and a numbers guy, so he manages the other areas of business like admin, accounts, banking and purchasing.
The success of the business depends on the strengths of both partners; and if one of them dies or becomes disabled, the other may find it difficult to run the business.
They discussed this concern with me, and I recommended them to buy a Keyman insurance on both their lives equal to last three years profit of the business.
Six reasons why your business needs Keyman Insurance?
Reason 1: To Mitigate loss of Revenue and Profits
In the above example, John handles all the key accounts of the business. He is mostly responsible for the revenue of the firm. John's death or disability may lead to the loss of those key accounts, resulting in loss of revenue and profits.
There are many ways in which death, disability or critical illness of a key personnel could affect a business like;
Loss of Key business accounts
Failure to deliver goods/services as agreed
Cash flow crisis
Inability to pay suppliers/bankers
Increase in hiring and training costs
Having a Keyman Insurance will help your firm with the necessary cash flow until an alternative strategy is planned and established.
Reason 2: For Succession Planning of a Family Business
A large number of businesses in the UAE are family owned. Family businesses typically have family members and or non-family employees who are crucial to their continued success. In the event of the sudden demise of the Founder/Owner a business faces many issues like;
- Finding and training a successor within or outside the family, who can lead and take the business forward
- Renegotiating Terms of Business with suppliers
- Renegotiating loans and facilities with bankers
The insurance proceeds of a Keyman insurance can be very handy in the event of the death of the founder/promoter. It provides the successor with a secure platform to learn, adapt, sustain and grow the business.
Reason 3 : To Buyout shares of the deceased Partner/ Director
A buy-sell agreement is a legally binding contract between the shareholders and/or partners (owners) of a business that restricts the transfer of their ownership interest to third parties.
It provides an orderly succession plan for the ownership and management of a business in the event an owner wants out. https://www.divestopedia.com
To ensure the availability of funds in the event of a partner's death to buy out the share of the business, many firms will purchase Keyman Insurance on the lives of all partners.
Having a Keyman insurance ensures peace of mind to the;
- Surviving partners, as they know that they don't have to hustle to arrange the necessary funds to buy out the shares of the deceased partner.
- The legal heir's of the deceased partner, who can breathe a sigh of relief, knowing that the funds necessary for the buy out are available
- Also the business cashflows are not affected.
Reason 4 - As collateral for Business Loans and Facilities.
Almost all banks require a Keyman Insurance on the lives of Owner/Partners/Directors as collateral to grant the business a loan or a facility. Having such insurance in place makes the loan/facility process easier.
Banks usually obtain a personal guarantee from the partners of a firm when granting a loan or facility to the firm.
In case a business is unable to pay the bank in the event of the death of a partner, the surviving partners may have to pool in money from their personal wealth to repay the bank.
By having a Keyman insurance in place, the partners can protect the interests of the lender, firm and their personal wealth as well.
Reason 5 - To Protect the interests of the employees and suppliers
In most cases, the business of a single Owner/Promoter also dies along with him or her. In such cases, the employees face an unexpected and uncompensated layoff and the creditors also remain unpaid.
As a responsible business owner, you can have a Keyman Insurance placed under a trust or with specific instructions in a will for compensating the employees and paying off the dues to the suppliers and other creditors. This allows the business to close in an orderly manner and with grace, instead of leaving unhappy employees and creditors.
Reason 6 - To improve chances of Venture Capital Funding
UAE has been a fertile ground for various startups, particularly in the technology and e-commerce industries. Both regional and international Venture capitalists are looking at Dubai as a gateway to this region.
In addition to a sound business plan having a Keyman insurance provides potential investors with much more confidence, encouraging them to invest in your startup.
In such cases, the Keyman insurance is typically taken out on the lives of CEO, CTO, CSO, CMO etc.,
Expert & Unbiased Advice
As a qualified and independent financial advisor, I can help you with the process of choosing the right amount of cover and riders required on your Keyman Insurance. Also will be able to
Schedule a free 15 minutes discovery call to understand if we can work together on your business protection needs.