Key man insurance is a type of insurance that most company directors take out. It is most often death insurance that covers the company director or any other important person in the company. That's probably why it's deliberately called key man insurance. Here's everything you need to know about this type of insurance.
Key person insurance: who's covered?
Key man insurance is a formula used by companies to protect the person designated as the most important person in the company. This is usually the head of the company. If the designated person dies or suffers an accident resulting in total incapacity to work, the company will receive a lump sum to cover the loss of earnings. Depending on the situation, the company's key person may be the manager, the company director, an employee who plays a vital role for the company, or an employee whose role is central to the smooth running of the company.
Key man insurance: why take out insurance?
Following the loss or disappearance of a key person, most companies find themselves in serious financial or management difficulties. This is where key man insurance comes in. Its purpose is to supplement the loss of money, whether direct or indirect, resulting from the absence of a key person.
In other words, taking out key man insurance means that the company can continue to operate properly even after the designated key man has disappeared.
The disappearance of a key person can have more or less significant consequences, such as a drop in sales, costs associated with reorganising the business, a drop in productivity, and costs associated with recruiting and training new managers or employees.
What is a key man?
The term "key man" refers to any person whose role in the company is decisive, particularly in determining turnover, productivity or sales results. For example, the key person in a company may be the manager or managers of a small or medium-sized business, or an employee with know-how, science, art or technique directly related to the company's purpose. This means that the key person can be either the head of the company or an employee whose role is crucial to the smooth running of the business.
How can I benefit from the tax advantages of key man insurance?
According to the tax authorities, not all key person insurance is the same. The real purpose of key man insurance should be to cover the financial consequences of the loss of the company's designated key man. This type of insurance is therefore comparable to business interruption insurance.
In order to benefit from the tax advantages of key man insurance, the insurance contract will have to meet a number of criteria.
Firstly, the beneficiary must always be the company and the designation must be irrevocable. In the case of a sole proprietorship, the beneficiary cannot be the operator himself.
Secondly, if a key person is defined as anyone who plays a decisive role in the running of the company, each structure must list key people.
It should also be noted that only incapacity for work of 3 years or more is taken into account, and the company's compensation must be determined on the basis of the business interruption suffered.
Finally, for the tax system to apply, the policy must not pay out any capital if the risk does not arise at maturity.
What are the guarantees?
The key man insurance policy can only be taken out by the company and in its exclusive interest. As a result, the company is both the policyholder and the beneficiary. However, it must be said that this is an essential condition to avoid misuse of corporate assets.
The key man insurance policy covers the death, absolute or permanent disability of the key man. As with death insurance, the company determines the amount of capital guaranteed in advance. However, this amount is determined after a very precise study of the causal link between the disappearance or incapacity of the key person and the company's good health.
Key man insurance: deductible from company profits
Where a key man insurance policy meets certain criteria, the premiums paid to the insurer are deductible operating expenses for the company in the financial year in which they fall due. For its part, it must be said that the compensation paid to the company when the risk for which it took out the policy materialises must be included in taxable income under the conditions of ordinary law (corporation tax or tax under ordinary law).
Furthermore, when a policy does not really meet the tax authorities' criteria, the corresponding premiums are not deductible from the taxable income of the years in which they were paid.
How do I take out key man insurance?
Before taking out key man insurance, the company must consider the loss of earnings that would be represented by the loss of a man whose actions are decisive for the company. This will enable them to determine the capital to be insured, which can vary from a few thousand euros to several million euros.
For small sums, the key person usually answers a health questionnaire. For much larger sums, they will have to undergo much more extensive tests to determine their physical condition. As a result, if the key person to be insured is a smoker, the insurance premium will be much higher, because the risk of death is statistically much higher. It should also be noted that accidental risks can be covered, and that key man insurance also works for women.
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