Protect Your Business Through Key Man Insurance

What is Key Man Insurance?

Key Man Insurance is a life insurance on the key person in a business. This usually the owner, the founder or a key employee. This person is crucial to a business, having a special skillset or substantial responsibilities, who contributes significantly to the profits of the organisation. The beneficiary as well as the premium payer is the employer, the life to be insured is that of the same employer’s key employee and the benefit, in case of a claim, goes to the employer.

Why do you need Key Man Insurance?

The main objective of Key Man Insurance is to cover the life of a key man for a monetary value hence in case of untimely death of such key man, the loss to the company is minimized with monetary assistance (insured amount) received from the insurance company. The company can use the insurance proceeds for expenses until it can find a replacement person, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner if needed.

How much coverage of Key Man Insurance do you need?

The coverage needed depends on how much is the potential calculated business loss in case of untimely death of the key man. There is no hard and fast rule to determine the value of sum assured, but generally, assessment of the goodwill for the business, sales of products or services and bill collections over a certain period of time can be a good guide to come up with a good estimate of coverage. 

What happens if a key man quits the company to join another?

The first employer, who has bought the Key Man policy, can choose any one of the following options:

  • The first company (employer) can stop paying the premiums and allow the policy to lapse. 
  • It may continue paying the premiums and collect the proceeds on a claim arising. 
  • The policy could be transferred to the new employer of the key man on terms mutually agreed upon .
  • It can be assigned in favour of the life assured / key man.

Is there any tax benefits of Key Man Insurance in Malaysia?

There are three angles to explain tax benefits of Key Man Insurance in Malaysia:

  • If the Key Man Insurance is an accident or term insurance, then the premium paid is allowed to be deducted as an expense as long as there is no investment elements in these policies. However, the proceeds will be taxable because the premiums were deductible earlier.
  • If the Key Man Insurance is a whole life investment-linked insurance, the premium paid cannot be deducted as an expense due to element of investment and it is treated as an asset. The proceeds however, will not be taxable.
  • If the Key Man Insurance purchased is on the life of a shareholder or business owner, the premium paid by the company is not deductible. This is treated as a benefit for shareholders and their families besides being a cover for risk of business loss.