What’s a Key Man Policy?

Ever think about what would happen to your business if, say, your star programmer suddenly left, or your genius CFO had to bow out? It’s a scary thought, isn’t it? We call these people “key persons,” and their absence could cause serious financial pain. Enter the superhero of the business world: the key man insurance policy.

These policies act like a financial safety net, helping to soften the blow if a critical employee or director can no longer fulfill their duties. They help replace the lost income and provide the means to hire someone new. We hope we never have to use them, but it’s good to know they’re there, just in case.

What does a Key Man Policy cover?

Now, you might be wondering, “Why would losing a key person be so costly?”, well lets think about it.

The scope of what a key man policy covers may surprise you. At its heart, the policy is there to ensure business continuity. To do this, the policy provides compensation for the losses incurred due to the key person’s absence. It’s not unlike how your car insurance policy helps you recover after an accident.

So, what exactly does this compensation cover? Here are some of the major points:

• Recruitment and Training: Hiring a new team member isn’t just about placing a job ad. There’s a whole process involved. Interviews, training, orientation – it can take months for a new employee to get up to speed. During this period, the business can lose revenue and incur additional expenses. Your key man policy covers these costs.
• Debt Protection: If the key person’s departure leaves your business unable to repay its loans, the policy can help. It can provide funds to repay or manage debts, ensuring the financial stability of your business.
• Investor Assurance: Investors like stability. The sudden loss of a key person can make them nervous. The policy can reassure them that their investment is safe, even in unfortunate circumstances.
• Lost Profits: Some key persons have a significant impact on the company’s profits. If their absence results in a drop in profits, the policy compensates for this loss.

What is the impact of Tax?

Next, let’s talk taxes. Yeah, I know, it can be as exciting as watching paint dry. But hear me out – it’s important. The Income Tax Act 58 of 1962 talks about how these policies are treated if your business owns them.

The juicy bits are in Section 11 w (i) and w (ii). These sections lay out the rules that company-owned policies must follow to be a tax-deductible expense. It’s a bit like a game of ‘Simon Says’, but with your money on the line. We can definitely chat about this more to see how it fits with your tax strategy.

So, that’s the lowdown on key man policies. I hope you never have to use one, but it’s always better to be safe than sorry. Remember, you’ve worked hard to build your business – a key man policy can help protect it.

Is it a fit for your business? Let’s discuss it and find out!