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Keyman insurance

How to insure key people
and protect your company properly!

 

Keyman insurance transfers the financial consequences of the loss of a key person to the insurer. In the event of a claim, a one-off lump sum payment is typically made to the company in the event of an insured event, such as the diagnosis of an insured illness or death. Due to our frequent advice to gamechangers in the life sciences, venture / private capital and growth company sectors, we often recognize the high value of individuals and the associated need for advice on Keyman insurance. This article is intended to provide comprehensive information about key man insurance. If you have any questions, please do not hesitate to contact us as your Risk Partners.

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What is Keyman insurance?

Key man insurance, also known as key person or key person insurance, is a special type of life or accident insurance that a company takes out for an essential person in the company. Such individuals may be directors, officers or other employees whose skills, knowledge and experience are essential to the success and stability of the business. These are often the founders of a start-up, who make up the value of the company, especially at the beginning. However, this topic is also often particularly relevant for small and medium-sized companies, as the managing directors and owners are often heavily involved in operational activities.

Insurable risks of Keyman Insurance

The following is a list of illnesses that can be covered by Keyman insurance, arranged according to the general probability of occurrence for an adult:

  1. Heart attack - also known as myocardial infarction.
  2. Stroke - also known as cerebrovascular insult (CVI).
  3. Kidney failure - also known as renal insufficiency or renal insufficiency.
  4. Chronic pancreatitis - also known as pancreatitis.
  5. Heart valve surgery - no alternative term, but there are different types, such as replacement or repair.
  6. Amyotrophic lateral sclerosis (ALS) - also known as Lou Gehrig's disease.
  7. Aplastic anemia (blood formation disorder) - also known as bone marrow failure.
  8. Bacterial meningitis - also known as meningitis.
  9. Open heart surgery - also known as heart surgery with a heart-lung machine.
  10. Disease of the heart muscle (cardiomyopathy) - specific types are dilated, hypertrophic or restrictive cardiomyopathy.
  11. Multiple sclerosis with neurological impairments - often simply referred to as multiple sclerosis.
  12. Severe rheumatoid arthritis - often referred to simply as rheumatoid arthritis.
  13. Systemic lupus erythematosus - also known as lupus.
  14. Paraplegia - also known as paraplegia or tetraplegia depending on the extent.
  15. Advanced Alzheimer's disease - also known as Alzheimer's dementia.
  16. Advanced Parkinson's disease - also known as Parkinson's disease.
  17. Advanced cancer - also known as malignant neoplasm, depending on the type.
  18. Transplantation of major organs - specific names depending on the organ, such as heart transplantation, kidney transplantation, etc.
  19. Polio (poliomyelitis) - also known as polio.
  20. Creutzfeld-Jakob disease (CJD) - a form of transmissible spongiform encephalopathy (TSE).
  21. Motor neuron disease - ALS is a form of motor neuron disease.
  22. Loss of hearing (deafness) - also known as deafness.
  23. Loss of vision (blindness) - also known as loss of visual acuity.
  24. Speech loss - also known as aphasia.

The following is a list of illnesses that can be covered by Keyman insurance, arranged according to the general probability of occurrence for an adult:

  1. Heart attack - also known as myocardial infarction.
  2. Stroke - also known as cerebrovascular insult (CVI).
  3. Kidney failure - also known as renal insufficiency or renal insufficiency.
  4. Chronic pancreatitis - also known as pancreatitis.
  5. Heart valve surgery - no alternative term, but there are different types, such as replacement or repair.
  6. Amyotrophic lateral sclerosis (ALS) - also known as Lou Gehrig's disease.
  7. Aplastic anemia (blood formation disorder) - also known as bone marrow failure.
  8. Bacterial meningitis - also known as meningitis.
  9. Open heart surgery - also known as heart surgery with a heart-lung machine.
  10. Disease of the heart muscle (cardiomyopathy) - specific types are dilated, hypertrophic or restrictive cardiomyopathy.
  11. Multiple sclerosis with neurological impairments - often simply referred to as multiple sclerosis.
  12. Severe rheumatoid arthritis - often referred to simply as rheumatoid arthritis.
  13. Systemic lupus erythematosus - also known as lupus.
  14. Paraplegia - also known as paraplegia or tetraplegia depending on the extent.
  15. Advanced Alzheimer's disease - also known as Alzheimer's dementia.
  16. Advanced Parkinson's disease - also known as Parkinson's disease.
  17. Advanced cancer - also known as malignant neoplasm, depending on the type.
  18. Transplantation of major organs - specific names depending on the organ, such as heart transplantation, kidney transplantation, etc.
  19. Polio (poliomyelitis) - also known as polio.
  20. Creutzfeld-Jakob disease (CJD) - a form of transmissible spongiform encephalopathy (TSE).
  21. Motor neuron disease - ALS is a form of motor neuron disease.
  22. Loss of hearing (deafness) - also known as deafness.
  23. Loss of vision (blindness) - also known as loss of visual acuity.
  24. Speech loss - also known as aphasia.

The tax treatment of Keyman insurance differs significantly between corporations and partnerships, which has relevant implications for both the premium payments and the insured event.

The advantage for corporations (e.g. GmbH, AG, SE) is that the contributions to a Keyman policy can be deducted as operating expenses. This leads to a direct reduction in taxable profit. If the insured event occurs and the insurance benefit flows into the company account, this must be taxed as business income in the year of receipt. However, this benefit usually leads to business-related expenses, which means that there is normally no increase in profit. Keyman insurance for corporations can therefore offer both tax advantages in terms of premium payments and effective protection without a significant tax burden in the event of a claim.

The situation is different for partnerships (e.g. KG). Here, the contributions for a Keyman policy cannot be booked as business expenses. This means that there is no direct tax relief from the premium payments. In return, however, the insurance benefit in the event of a claim is not classified as business income and is therefore not subject to taxation. This regulation reflects the tax classification of partnerships, where the tax consequences are attributed directly to the partners.

The purpose of keyman insurance is to mitigate or compensate for financial losses that could arise due to the unexpected loss of this key person, whether through death or serious illness (see the accordion below the image for examples). The insurance benefits can be used, for example, to finance the search for and training of a replacement, to compensate for lost profits or to cover loan liabilities for which the key person has guaranteed.

Keyman insurance is therefore a central risk management tool for companies to minimize financial risks or create liquidity in times of crisis that can be caused by the loss of a key person. Such insurance also demonstrates to investors, lenders and partners that the company proactively manages risks and is prepared for unforeseen events, which boosts confidence and can improve creditworthiness or increase the desire to invest.

What information do we need for a market survey?

In order to conduct an effective market survey on key man insurance, it is important to collect targeted information from key people and offer this to the right provider in a structured way. This data enables providers to create a customized offer that is precisely tailored to the needs and requirements of the company. Below you will find an overview of the information that is regularly required:

  1. Names of the persons to be insured and their dates of birth**: This is the basis for assessing the risk profiles individually.
  2. Desired insurance cover: This is about the structure of the insurance (Keyman, term life insurance or "serious illnesses" (dread disease))
  3. Selection of the sum insured (framework)**: The amount of the sum insured plays a decisive role in determining the premiums and the scope of the insurance cover
  4. Smoking status: Whether the person is a smoker or non-smoker (and since when) has a significant influence on the risk assessment.
  5. Professional information: This includes the job currently held, the highest educational qualification and whether there is personnel responsibility (including the number of subordinates).
  6. Special risk sports / hobbies: The practice of special risk sports or hobbies, including motorcycling, is relevant for the risk assessment.

Our aim as insurance brokers is to make this process as efficient and uncomplicated as possible for you. We understand that time and resources are valuable and therefore strive to minimize the effort for you. In the following, we would like to introduce you to the process of comparing Keyman insurance and our consulting approach.

Selected providers from our market surveys:

What sum insured do you need for Keyman insurance?

We see two cases here. Firstly, the requirements of investors, which we implement, and secondly, companies that want to insure their risk. In the second case, the sum insured should ideally correspond to what the company would incur if it lost a key person. Depending on the type of business and the position of the employee in the company, the required insurance amounts and terms can vary greatly. As a guideline, based on our experience, a value of 2-4 times the usual annual gross salary can be assumed.

In consultations, we also take individual factors into account when determining the sum insured, including in extracts:

  • Recruitment costs for a new person with the same qualifications
  • Consideration of the new person's induction period (6-12 months)
  • Costs for an interim function (e.g. by an interim managing director)
  • Consideration of the loss of knowledge and customer relationships
  • and more

Depending on the evaluation of the factors, this individual procedure leads to a more accurate result for the company than the above-mentioned guideline value.

Manager liability - How to cover your ass! 

Our Managing Director Florian was a guest on the Recruiting DNA podcast by the life science specialists from Pates and gives valuable tips on the topic of "manager liability".

"We see the demand for key man insurance for the founding team, especially in term sheets from US VC investors (equity/debt). Surprisingly, not only for early-stage seed investments, but also for Series A/B investments. In addition, biotechs are also more sensitive to the key person risk."

The key person leaves the company, what now?

Keyman insurance can be terminated under certain circumstances. 

On the one hand, Keyman insurance can be terminated in the normal way at the end of the insurance period (after the expiry of a minimum contract term, if applicable). This gives companies the flexibility to regularly review the insurance policy and, if necessary, adjust or renew it to meet the company's current risks and needs.

Secondly, there is the option of extraordinary termination in the event of a so-called risk event. Such a case occurs when the insured key employee leaves the company. As the company is both the premium payer and the beneficiary of the policy, the original purpose of the insurance no longer applies when the key employee leaves. 

Claims example for Keyman insurance

The biotech start-up GenInnovate GmbH, which is working on a breakthrough in cancer therapy, suffers a setback when its leading researcher unexpectedly suffers a long-term stroke. His absence delays the research and jeopardizes important partnerships with a pharmaceutical company as well as the upcoming financing round. GenInnovate is able to cushion the financial losses with the Keyman insurance policy taken out for key personnel such as Dr. Bergmann. The insurance benefit makes it possible to bring in external experts and continue the research, saving the project and securing the future of the start-up.

What are the typical differences in benefits and what does the insurance cost?

We will not only assist you with the important decision on the cost side of key person insurance, but will also advise you in detail on the significant differences in the benefits offered by various providers. Our aim is to provide you with transparent advice to help you make a well-considered choice. Below you will find examples of some of the criteria that we take into account when reviewing the policy conditions for you:

 

 

  • Early payouts for specific events
  • Cover for a second claim
  • Duration of waiting and waiting periods
  • Options to increase the sum insured in the event of certain events, without a new medical examination
  • Optional additional benefits such as cover in the event of disability or the need for long-term care
  • Basis for calculating the premium (investment strategy)
  • Structure of the premium structure (Explanation: The premium rates and associated profit models of insurers vary considerably. Premiums are often variable and not fixed throughout, depending on the insurance company and the specific contractual conditions. Our advice therefore pays particular attention to premium structures and the definitions of benefit triggers, i.e. insured illnesses or deaths).


If your Keyman insurance policy is taken out in connection with a VC fund, we will also review the contractual clauses for you with regard to any content requirements (due diligence / death benefit, specific illnesses covered, etc.).

Provider
Dread Disease
(insured illnesses)
Dread Disease
(benefit)
Death benefit
Costs
Insurer A
45 serious illnesses, 21 minor illnesses (lower benefit)
200.000 €
200.000 €
147,37 €
Insurer B
48 (serious) illnesses
200.000 €
5.000 €
147,67 €
Insurer C
55 (serious/mild) illnesses
200.000 €
2.000 €
157,65 €

Conclusion on Keyman insurance

Keyman insurance is an essential pillar of a company's risk management, which plays an important role in securing the financial stability and liquidity of smaller companies in particular, especially start-ups and scale-ups. This is one of the reasons why venture capital funds from the USA are increasingly demanding it. Properly implemented, it offers indispensable protection to cushion the financial losses that can result from the loss of a key person. However, comprehensive risk provisioning requires more than just financial compensation. Organizational measures are just as crucial to ensure the continuity of the company in crisis situations.

A well thought-out emergency plan ideally complements the keyman insurance by regulating how to react to the loss of a key person at an organizational level. This includes the involvement of relevant persons such as lawyers, the coordination of headhunting, access to important passwords and admin access, as well as regulations on precautionary and corporate powers of attorney. In addition, the planning of the company management in terms of what is unusual is of great importance. The prior recording of his ideas and wishes provides valuable orientation for the continuation of the company.

An emergency plan that takes all these aspects into account contributes significantly to the resilience of the company and ensures its continued existence in critical times. As your risk partners, we not only advise you on how to take these organizational precautions, but also offer you access to optimal insurance solutions as an independent insurance broker. Our expertise and support ensure that you are not only financially but also organizationally well positioned to successfully master the challenges that the loss of a key person can bring.

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