Keyman insurance in 2024. A complete guide.
Keyman insurance
Also called key man or key person insurance, keyman insurance is essential for businesses that want to insure their core employees.
This guide to keyman life insurance will help you determine if this life insurance product is right for your business and help you choose the best keyman insurance policy.
Table of contents
- What is keyman insurance?
- Types of keyman insurance
- Keyman insurance tax deductible
- Keyman insurance cost
- Affordable keyman insurance
- Best keyman insurance policy
- Keyman insurance online
- Keyman insurance quotes
- Keyman insurance FAQ
What is keyman insurance?
Keyman insurance is designed to insure employees who are difficult to replace. The term “key man” refers to a company’s most valuable employees.
Businesses can face interruptions and financial setbacks if they lose core employees, and that’s what this type of insurance aims to mitigate.
The primary aim of key person insurance is to support a company in maintaining its operation after the disability or even death of a core employee.
If a core member of the team becomes disabled or passes away, the insurance policy financially helps the company to recover from the setback and/or replace them.
Effectively, in a key man life insurance policy, the insured is the employee, and the beneficiary (i.e. the entity that will receive the death benefit) is the company.
Lenders, investors, and those cooperating within a company’s management, often require keyman life insurance.
What makes someone a key man?
A key person is someone that a business considers indispensable.
The key man is often the business owner but could also be a highly skilled individual with a specialized role.
Such employees can be challenging and expensive to replace, and their loss would significantly impact the whole company.
Sole proprietors may also choose this insurance product to protect family members who will inherit the family business.
Along with the owners of a company, the following traits define who the other key men in your company might be.
- Someone who is driving success in your industry or team.
- Those who are specialists in their industry with specific expertise.
- Employees who carry out specific duties that will take time to replace.
- Anyone responsible for generating or managing significant revenue.
Keyman insurance meaning
Keyman life insurance can also be useful when companies don’t have keymen.
For example, business partners can purchase a keyman insurance policy to buy out a former partner’s shares in a company in case of his death. In this case, the death benefit in keyman insurance functions as compensation for the heirs of the deceased.
Keyman insurance is especially useful for companies that depend on one person’s expertise, duties, or reputation to generate revenue.
However, this type of insurance is unnecessary for those who work in an industry with unqualified employees or those with generalized skills.
What keyman insurance covers
Keyman insurance covers a company in the event of employee death or disability.
You can usually cancel the keyman insurance policy or transfer it to the insured for their own use if they leave the company.
The proceeds from keyman insurance can also be used in the following ways:
- To use towards any lost income.
- Covering your operating expenses until you hire a replacement.
- Training a new member of staff to replace the key person/s who left.
- To purchase a former owner’s ownership interest in the company (which will require a buy-sell agreement).
You can also use the insurance proceeds in the following ways if you decide to close the company:
- Distribute the money to investors.
- Pay off any outstanding debts to lenders.
- Provide severance pay to your employees.
- The final expenditure for closing the company down.
Types of keyman insurance
Keyman insurance is a life and disability insurance product available in the following forms.
- Term life keyman insurance
- Whole life keyman insurance
- Variable life keyman insurance
- Disability keyman insurance
Term life keyman insurance
The most popular form of keyman insurance is term life insurance.
As the ultimate beneficiary of the policy, the company will receive the death benefit if the insured dies anytime during the policy term.
Term life insurance is the cheapest form since it does not have a savings portion (like whole life insurance).
Term life insurance can cover your employees for 10 - 30 years, depending on your company’s needs.
The most popular forms of term life insurance for key man insurance purposes are the level and the renewable policy.
Level term insurance is an optimal choice if the company plans to keep the employee until their retirement or in case the employee is close to retirement. The duration of the insurance will be the time left until the employee’s retirement.
Level term insurance is the most affordable term life insurance policy since the premiums remain unchanged throughout the contract.
A renewable policy should be chosen in case of employees with long-term contracts (e.g. 5 or 10 years) that can be renewed.
Renewable term policies are more expensive than level term policies, but their main advantage is that they are renewable without the employee being obliged to pass medical exams.
Practically this benefit means that even terminally ill employees will be insured blindly.
As with all life insurance contracts, term life insurance can be paid monthly or annually.
Whole life keyman insurance
Also known as permanent life insurance, whole life insurance does not expire. So long as the company pays the premiums on time, it remains in effect.
Whole life costs more than term life insurance because the premiums go into a savings account and gain cash value that the company can withdraw or borrow against.
Whole life insurance is not recommended for keyman insurance purposes since it is extremely expensive.
Variable life keyman insurance
Variable life insurance is comparable to whole life insurance because it’s valid so long as you pay your premiums.
However, the premiums are placed in investment accounts, not savings accounts making these policies riskier than standard whole life.
Again, like whole life insurance, variable life keyman insurance is not recommended to insure key employees.
Disability keyman insurance
You can add a disability component or rider to your keyman insurance.
The insurance company will usually pay a benefit of the key employee’s salary if they face a disability that prevents them from performing their work duties.
Keyman insurance tax deductible
Let’s answer the question, is keyman insurance tax deductible?
As all life insurances in Cyprus are tax deductible and keyman insurance is a life insurance product, it is fully tax exempted.
Specifically, the insurance premiums are considered part of the company’s operating expenses and tax exempted.
Keyman insurance tax treatment
In practical terms, suppose the annual key man insurance premiums are €50,000. The company will save the following calculation on taxes:
Corporate Tax * Insurance Premium = 12.5% * €50,000 = €6,250.
If shareholders of the company are also domiciled in Cyprus, then there are additional tax exemptions on dividend tax which is 17%.
How much keyman insurance do you need?
Your company’s needs will determine how much coverage is necessary to insure your core employees.
Although there is no obvious answer to the amount of insurance you need, you can consider how much it would cost to replace your employee/s to estimate a figure.
When determining this figure, consider the percentage of the key person’s contribution to the company’s revenue and their current salary. You can ask an insurance agent the number at which to multiply these figures to get the correct amount of insurance for your needs.
In summary, consider the following factors to make sure you won’t be inadequately covered or buy more insurance than you need:
- The cost to replace your employee/s. Calculate estimated costs to hire and train a replacement for the key person and the possibility of any lost income.
- The contribution to earnings. Multiply the amount the key person earns for the business by the number of years your company will take to replace their earnings. Startups can use revenue figures, whereas established companies should consider profit.
- The multiple of compensation. If you use performance-based compensation, multiply the key person’s compensation by the number of years it will take your company to fully recover from losing them.
Key takeaways
Keyman insurance is also called key man or key person insurance and is an essential option for businesses that need insurance for their core team members.
Key person insurance supports a company to operate if a core employee suffers a disability or passes away.
A keyman insurance policy financially helps the company to recover from the setback of losing an employee and helps replace them.
Keyman life insurance is often required by lenders and investors and those cooperating in a business at the management level.
Keyman insurance can be a lifeline for your company if you lose a key employee.
Keyman insurance cost
The cost of keyman insurance policies depends on several factors. Specific factors determining your premiums include the following:
- Limit of coverage.
- Age. The higher the age, the higher the cost of premiums.
- Gender. Women pay less than men due to their higher life expectancy.
- Past medical conditions. Past medical conditions might affect the insurance’s value depending on the disease’s severity. For example, if you had cancer in the past, even if you fully recovered, insurance companies might refuse to insure you or increase the premium significantly.
- Pre-existing medical conditions.
- Smoking and drinking alcohol also increases premiums as they are risk factor.
- Weight. Being obese and overweight, according to the BMI ratio, increases premiums.
- Medical history of parents. Your premiums will be higher if your parents suffer from pre-existing conditions, stroke, heart attack, inherited diseases, or prematurely passed away.
- Dangerous, extreme, and risky sports (e.g. skydiving, bungee jumping, mountain climbing, canyoning and diving).
- Additional benefits (i.e. riders) also increase the cost of insurance (i.e. life insurance, critical illness coverage, permanent disability benefits etc.).
You usually need to purchase separate policies per person for your key employees.
Affordable keyman insurance
When searching for cheap keyman insurance in Cyprus, it’s important to note that the insurance market is very competitive. Insurance premiums rarely differ for this reason.
If there is a stark difference between the price of the two policies, the coverages won’t be comparable, and the cheaper one may be lacking in cover.
Therefore, a cheap product may not meet your needs.
To save money on your insurance, we recommend:
- Acquire a level term life insurance policy.
- Don’t choose optional coverage (i.e. permanent disability benefit) and only buy what you need to eliminate unnecessary costs.
- Acquire another contract with the same insurance provider to receive discounts. Insurance companies usually provide offers for acquiring more than one policy.
- Speak with an experienced insurance agent, as they will guide you to make optimal decisions.
Best keyman insurance policy
Pitsas Insurances provides the best keyman insurance in Cyprus at highly competitive rates.
Why choose Pitsas Insurances:
- We offer the lowest premiums in the industry.
- We give our existing customers discounts on their insurance.
- We cooperate with the most experienced and largest underwriters.
- We provide discounts if you acquire more than one business contract with us.
- We have 35 years of experience and work with experts in the industry.
Keyman insurance online
Pitsas Insurances is among the largest providers of business insurance contracts in Cyprus and notably one of the most significant business insurance service providers to Cypriot, European and international companies.
Our clients include international investment and financial corporations, software developers, law firms, and construction and shipping companies.
We cooperate with the best local and international underwriters enabling us to compare all available keyman insurance policies.
We provide additional discounts on all fixed prices.
Keyman insurance quotes
The whole process to acquire keyman insurance can be done online, and you don’t have to visit our office to buy it.
Communicate with one of our insurance experts today for a hassle-free quote online.
Keyman insurance FAQ
What is keyman insurance policy?
A keyman insurance policy will help to support a business to keep operating without its most valuable employees.
A keyman insurance policy will financially support a company in the event of a key person’s or key people’s death.
A keyman policy can also include a disability coverage rider to financially protect a company if keymen become disabled and can’t carry out their usual duties as before.
In addition, you might have the option to borrow against your policy’s cash value or withdraw cash from your policy.
Nevertheless, borrowing and withdrawing cash will reduce the death benefit amount.
Pitsas Insurances Team