What is Key Employee  Insurance?

Key employee insurance can be defined as an insurance policy whereby the employer takes on insurance coverage for his or her company’s key employees. When a claim is made, the sum assured goes to the employer.

The Key Employee here can be any staff who contributes notably to the profits of that organization.

So, what’s the Abundant Life Planner’s approach to Key Employee Insurance?

Using our 100 unique questions on the vulnerabilities on the company, we find out what’s important to you as the business owner and what keeps you awake at night. What’s important for you, your family and your business may not be the same for another person nor another business.

From there, we build a bespoke and customised Financial Home tailored to your company specifically.

What happens if I don’t plan for Key Employee Insurance?

  1. Business continuation may be greatly affected – Will my business still be able to continue?
  2. Projects may be delayed or not completed
  3. Business needs time and monies to recruit and train a replacement – How long will this take?
  4. Business may not be able to cope with the competition – Will I lose my competitive advantage?
  5. Loss of goodwill cultivated by the key employee
  6. Business profitability will be adversely affected
  7. Morale of the other employees may be affected
  8. Business’s credit rating may be affected
  9. Worse-case scenario of a business insolvency or closure with liability remaining for outstanding debt

What happens if a Key Employee quits the company to join another?

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

  1. The first company (employer) can stop paying the premiums and allow the policy to lapse.
  2. It may continue paying the premiums and collect the proceeds on a claim arising.
  3. The policy could be transferred to the new employer of the Key Employee on terms mutually agreed upon by both the companies.
  4. It can be assigned in favour of the life assured / key employee.

Are the premiums tax deductible?

Premiums incurred on a “key employee” insurance policy is deductible if all of the following conditions are met:

  1. The purpose of the policy is to insure the business against loss of profits arising from the death or disability of a “key employee”
  2. The capital sum insured is directly related to the extent of the annual profits directly attributable to the services of the “key employee”
  3. The insurance policy remains the property of the business, and there must not be any assignment of the benefits under the policy to the insured or his family
  4. The insurance policy does not provide for a cash surrender or investment value
  5. The loss of the “key employee” does not affect the business’ entire profit-making structure

How much should I cover?

A key employee’s value can be derived as:
The amount directly attributable to the key employee X Number of years needed to replace the key employee.

Example:
ABC Company’s average profits for the last 2 years is SGD 2m annually. The key employee is responsible for bringing in 40% of the profits. ABC Company estimates that it will take 3 years tp replace and restore profits to the previous level.

As such, the estimated value of the key employee is: (SGD 2m*40%) * 3 years = SGD 2.4m