What is the Application Process for key person insurance?
After you submit your quote request, we will review the marketplace with your details and requested benefit amounts.
We will then email you the quote proposal.
You can then advise us of whether you have any queries, or would like to proceed with an application.
We will then arrange a suitable time to undertake the application over the phone. This generally takes about 15-25 minutes.
The insurer’s underwriter will then review the application and either issue the policy or request further information such as a medical history. Where large sums insured are involved, a health exam may be undertaken by a mobile nurse (at the insurer’s expense).
When all information is received, the insurer may then issue the policy, offer terms with exclusions of existing conditions or decline the policy. Generally, most insurers will endeavour to offer some form of cover, however, we do have access to a profound underwriting service for difficult situations.
Which company should I use for my keyman policy?
We only recommend major insurance companies.
The type of insurance cover that you are taking, as well as your individual circumstances will then dictate the suitability of each company. Some insurers specifically target market niches such as medical or blue collar workers, while others offer packages suitable to people 45 years and over.
We utilise brokerage software that combines policy pricing with definition suitability based upon age, occupation and policy benefits. These can then be reviewed to discuss your preferred choice of insurer.
What are the key points for taking out keyperson insurance?
1. Understand the need for keyperson insurance:
You are likely to have your business assets such as cars, computers and contents insured. But what happens to your business if you or your key employees are off work for a considerable time?
2. Calculation of the benefits required:
Business needs for key person cover can include pay outs for loan accounts, debts owed by the key person, personal guarantees, loss of revenue, recruitment costs and replacement person salary.
3. Understanding of different types of cover:
There is Keyperson Revenue cover for revenue replacement and Keyperson Capital cover to meet any loans or capital expenses. Business Partner cover is bound by an agreement to cover the life or disability of each business owner to pay out their interest on benefit payment.
4. Structuring ownership of the cover:
We can assist to ensure that the ownership of the policy is tailored to your business needs. This may avoid unnecessary complications at benefit payment time such as capital gains tax triggers. Tax deductibility of premiums may also be possible depending upon the type of cover selected.
What are the uses for Keyperson insurance?
There are a variety of uses of Keyperson insurance including but not limited to:
1. Business succession planning for business partners
2. Salary continuity for the surviving spouse
3. Requirements met for bank business loan to expand and grow
4. Providing funds for recruitment and training a suitably qualified replacement employee
5. Meeting business expenses while the company undertakes this transition
6. Payment of any capital loans or personal guarantees in the event of a major illness, injury or death of a key person or business partner
7. Executive salary packaging benefit
How much Keyperson cover do I need?
This will be dependant upon your business needs and is an area where advice is best sought.
As an indication, there are a variety of methods including the:
‘replacement cost method’ (what the cost is to replace the keyperson),
‘contributions to earnings method’ (percentage of earnings to company revenue)
‘multiples of income method’ (current salary multiplied to determine value)
Each business is different and requires specific consideration prior to determining a suitable amount of cover. You are welcome to call us on 1300 78 55 77 to discuss this free of charge.
Are Keyperson insurance premiums tax deductible?
You should refer to your accountant for specialist tax advice. Generally, the purpose of the policy will deem whether the Keyperson policy premium is tax deductible or not.
Does the business partner Buy-Sell Agreement have to be reviewed annually?
We would suggest that annual reviews would be ideal for your business as it may be the case that your circumstances have changed. This may include the levels of debt being increased or decreased, the profitability of the business has altered from last year or new key persons have been added.
Some policies have a business safeguard option that allows your policy to be increased by up to $10m (life cover) without any need for new medical evidence.
My bank needs me to have the policy for a loan. How long does it take to get a Keyperson policy?
While we have a good relationship with many underwriters at insurance companies, if health records are required from your doctor, then this may slow the process down. Generally, we recommend that you allow 4 to 6 weeks for the policy to be assessed by the insurance company.
My bank needs to have an assigned ‘interest’ on the Keyperson policy due to a business loan. What does this mean?
You and your business still retain the policy, however the bank is included as an interested party.
We have structured policies in the past in this manner. It generally means that the bank is notified if there is a benefit paid out to your business, not that they are necessarily going to be the beneficiaries of the policy. Unless they specifically require this clause in the loan agreement contract.
What are Put and Call Options within a Buy-Sell Agreement?
In a Business Succession Agreement, where there is funding for the purchase price (e.g. because there is an Insurance Policy), it may contain two options:
The Call Option – one exercisable by the Purchasers; and
The Put Option – one exercisable by the Vendor.
Over time, the purchase price may be reviewed while the owners are alive due to varying business worth.
This avoids disputes with respect to the valuation after one of the Proprietors has died and it provides certainty to both the Purchaser and the Vendor, as one option will be exercised.
Do we really need a Buy-Sell Agreement if we take out insurance on each business partner?
Yes. If you haven’t signed a Business Succession Agreement then there is no actual ‘crediting provision’ for the transfer of the assets to the remaining business owner/s.
The Estate could potentially ask for payment of the business value, even though the insurance proceeds have been received.
Therefore we very strongly recommend that a Business Succession Agreement be documented to avoid issues such as these.