The success of many companies today can be attributed to many factors such as good management, good foresight, good location, good pricing, good cash flow and superior customer relationship. All these factors contribute to the success of the company are possible because of the existence of the most important assets of the company – THE KEYMAN.
The keyman is the person or persons that are instrumental to the success of a company. The keyman normally possess special qualifications and experience that are of irreplaceable value to the company such that his death would result in the company suffering a significant loss of profit. The CEO, Managing Director, Chief Accountant and employees with highly specialised skills or knowledge are some of the keyman within the company.
The contributions/responsibilities of the keyman are:
- The keyman is the main person or persons that will set the direction and management of the company;
- The keyman is accountable for the majority of the sales; and
- The keyman is responsible partly or wholly responsible for the profitability.
Since the keyman is important to the company, the loss of the keyman can be catastrophic to the company. Many companies have closed down or have been forced into liquidation or bought over due to the demise of the keyman. We insure our cars, our plant and machinery and our office buildings against fire. We even insure the office furniture, the desks; so why don’t we insure the person behind the desk?
Keyman Insurance provides the protection a business needs for its most precious profit making asset, a human being. If that person dies, the employer is likely to suffer financial loss from which, if unprepared for, may never recover. Keyman Insurance insures the company for loss of profits arising from the demise of these keymen. It compensates the company for the loss of the people who are crucial to the continued profitability and growth of the company. The importance of keyman insurance cannot be underestimated. Citing an example in Singapore, the Swatow restaurants are a chain of restaurants that are now closed down due the demise of the keyman. Keyman insurance helps to keep the company’s going as the successor find his way to manage the company in the same manner as the deceased business owner.
To the business owners, keyman insurance is useful in the demise of the keyman in:
- maintaining the same level of profitability in the absence of the keyman;
- buying time to find a suitable replacement of the keyman; and
- most importantly, ensuring a smooth and orderly transition.
With a keyman insurance put in place to provide compensation to the company against loss of profit, it is a win-win situation for the company and the shareholders. To the company, the insurance proceeds will provide a financial cushion as they source for a replacement and at the same time maintain the profitability. To the shareholders, the value of shares will remain substantially the same before and after the loss of the keyman.
Income Tax Treatment
The premium paid for the keyman insurance may qualify for tax deduction. However, there are conditions to be met in order for the premium to qualify for deduction. Some of the conditions are:
- The insured must be the key person;
- The policy must not have any cash value;
- The sum assured must be directly attributable to the profits generated by the keyman;
- The company must be able to continue to operate after the demise of the keyman;
- No benefits whatsoever must accrue to the keyman or his family; and
- No assignment is allowed.
Where the premium qualifies for deduction, the proceeds received upon the death or total and permanent disability of the keyman will be taxable on the Company.
I hope my insights on this vital topic has helped you relook at your business plans and discover the pressing need to be prepared for whatever that comes your way!
AFA 2016: BUSINESS INSURANCE PLANNING
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