What is keyman insurance?
Stanford University research reported that nine out of ten new businesses fail during their first two years of operation and for those businesses that have made it attributed their success to business knowledge, market awareness, and hands on management, sufficient capital and hard work.
I personally know of some businesses that didn’t make it because of insufficient capital or cash flow. I remembered vividly in one of the seminar that I attended, the speaker said that cash flow is blood flow for any business. If the blood doesn’t flow in the body, it becomes a dead body. Therefore cash flow is very important for any business, manage it well and you can continue to enjoy the fruits of your hard labour.
It is important to plan for successful business continuity and not allow any event to disrupt your business. One of such event is the death or disability of a keyman working for the company. This refers to a key personnel who possesses special qualifications and experience that are of irreplaceable value to the business. In this context, special qualifications is not limited to academic and professional qualifications, but include other abilities such as personal connections, business acumen etc. The key requirement is to demonstrate that these qualifications are pivotal in bringing in profits for the company. The “keyman” is, thus, someone who has the prime responsibility for bringing in the profits for the business and his or her death or disability would result in the business suffering a significant loss of profits.
(The definition of keyman is taken from the glossary of IRAS e-Tax guide on ‘Deductibility of keyman insurance premiums)
How does the keyman insurance works?
An employer may take out a keyman insurance on the life of any employee who is considered as ‘keyman’. The company is the policy owner of the insurance policy and the life insured is the employee. In the event of death or disability of the employee, the insurance proceed or pay-out goes to the company to cover the cost of hiring and training of another key person. In the meantime, the company may suffer loss until the successor can take over the responsibilities and perform at the same level.
Keyman insurance can also be used by partners in any partnership company together with a Buy-Sell agreement, which is a legal document, to provide funding for business partners to buy over the other partner share of the business in the event of death or disability. Without such arrangement, the share of the deceased partner will go to his or her estate and to be distributed according to his or her will. The other partners may find themselves having to work with much younger or inexperienced new partner. The deceased partner’s family member may have no interest in the business and may like to sell their share to the other partners, provided that the other partners have the funds to buy over the share.
This would leave the company in an awkward position and unable to move forward.
The situation is made worse if the deceased partner has minor children and is in need of funds for their maintenance.
Type of insurance used
Term insurance is commonly used for keyman insurance as it is the cheapest type of insurance compared to whole life, ILP or endowment. Some companies use universal life policy for keyman insurance. Universal life policy is a hybrid form of insurance that covers for whole life and has a guaranteed crediting rate of 3% p.a. on annual premium. There is also an innovative term insurance product that will return all the basic premiums paid at the end of 30-years maturity.
Please read my page on Buy-Sell agreement to review the insurance perspective, "Why you should consider the disability and critical illnesses scenarios in your Buy-Sell agreement?"
Keyman insurance quotes
We can compare quotes from the following insurers with Term or Universal Life insurance listed in alphabetical order:
Please fill up the form below for us to compare quotes for you.
I personally know of some businesses that didn’t make it because of insufficient capital or cash flow. I remembered vividly in one of the seminar that I attended, the speaker said that cash flow is blood flow for any business. If the blood doesn’t flow in the body, it becomes a dead body. Therefore cash flow is very important for any business, manage it well and you can continue to enjoy the fruits of your hard labour.
It is important to plan for successful business continuity and not allow any event to disrupt your business. One of such event is the death or disability of a keyman working for the company. This refers to a key personnel who possesses special qualifications and experience that are of irreplaceable value to the business. In this context, special qualifications is not limited to academic and professional qualifications, but include other abilities such as personal connections, business acumen etc. The key requirement is to demonstrate that these qualifications are pivotal in bringing in profits for the company. The “keyman” is, thus, someone who has the prime responsibility for bringing in the profits for the business and his or her death or disability would result in the business suffering a significant loss of profits.
(The definition of keyman is taken from the glossary of IRAS e-Tax guide on ‘Deductibility of keyman insurance premiums)
How does the keyman insurance works?
An employer may take out a keyman insurance on the life of any employee who is considered as ‘keyman’. The company is the policy owner of the insurance policy and the life insured is the employee. In the event of death or disability of the employee, the insurance proceed or pay-out goes to the company to cover the cost of hiring and training of another key person. In the meantime, the company may suffer loss until the successor can take over the responsibilities and perform at the same level.
Keyman insurance can also be used by partners in any partnership company together with a Buy-Sell agreement, which is a legal document, to provide funding for business partners to buy over the other partner share of the business in the event of death or disability. Without such arrangement, the share of the deceased partner will go to his or her estate and to be distributed according to his or her will. The other partners may find themselves having to work with much younger or inexperienced new partner. The deceased partner’s family member may have no interest in the business and may like to sell their share to the other partners, provided that the other partners have the funds to buy over the share.
This would leave the company in an awkward position and unable to move forward.
The situation is made worse if the deceased partner has minor children and is in need of funds for their maintenance.
Type of insurance used
Term insurance is commonly used for keyman insurance as it is the cheapest type of insurance compared to whole life, ILP or endowment. Some companies use universal life policy for keyman insurance. Universal life policy is a hybrid form of insurance that covers for whole life and has a guaranteed crediting rate of 3% p.a. on annual premium. There is also an innovative term insurance product that will return all the basic premiums paid at the end of 30-years maturity.
Please read my page on Buy-Sell agreement to review the insurance perspective, "Why you should consider the disability and critical illnesses scenarios in your Buy-Sell agreement?"
Keyman insurance quotes
We can compare quotes from the following insurers with Term or Universal Life insurance listed in alphabetical order:
- AIA Co.
- China Life Insurance Company Limited
- China Taiping Insurance Holdings Co Ltd
- Etiqa Insurance Pte Ltd
- Friends Provident International
- FWD Singapore Pte Ltd
- HSBC Life Singapore
- Income Insurance Limited
- Life Insurance Corporation
- Manulife (Singapore) Pte Ltd
- Raffles Health Insurance
- Singlife Life Limited
- Swiss Life Global Solutions
- Sun Life Singapore
- Tokio Marine Life Singapore Ltd
- Transamerica Life (Bermuda) LtdBranch)
Please fill up the form below for us to compare quotes for you.