Keyman Insurance: Why is this insurance a must have for business owners?

Small and Medium Enterprises (SMEs) i.e. businesses with a turnover of less than AED 250 Million are the backbone of Dubai’s economy, representing 95% of all establishments in the Emirate. These SME businesses account for 42% of the workforce and contribute around 40% to the total value add generated in Dubai’s economy.[1] The power behind this engine is the business owner/key person.

Defining Keyman Insurance

It is the dream, vision and risk-taking ability of the owner that gives birth to the business and through his hard work, it flourishes. Banks lend to and suppliers work with the businesses because of the ability of the owner/key person to make profits and keep financial commitments.

While a business normally insures all its assets (building/stocks etc.)  However, it sometimes forgets to insure is most valuable asset – the KEYMAN.  Keyman could be the Founding Owner / Director / Key Technical Personnel.

Keyman Insurance protects businesses from falling in the hands of creditors/banks in the event of untimely death of the key person.  In such a situation, insurance policy will pay off to the creditors / banks and business can be passed on to the next generation – debt-free.  Of course, all loans are secured – but if all assets (which are under lien to the creditors/banks) go to repay those liabilities, what remains for the family?

Keyman Insurance is the cheapest form of ensuring that family / remaining shareholders get business without any liabilities, market is assured that it is business as usual and that their funds are secured in CASH and not through sale of assets.

Cost of Keyman Insurance is negligible and most organizations add it to the cost of borrowing.

Following diagrams illustrate this concept:

[1] THE STATE OF SMALL & MEDIUM ENTERPRISES (SMEs) IN DUBAI: A report by Dubai SME An agency of the Department of Economic Development

 

How does Keyman Insurance Work?

For the Key Employee

A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. The purpose of Keyman insurance is to help the company survive the blow of losing the person who makes the business work. The company can use the insurance proceeds for expenses until it can find a replacement person.

For the Partnership

Keyman Insurance in partnerships can be used to stabilise business in the event of death of a partner.  Company insures all the partners in the proportion of their share in the firm.   Company pays the premium.  In the event of death of a partner, insurance proceeds can be used to pay deceased partner’s share in the business and surviving partner inherits the business.  This arrangement avoids having to sell off company assets to pay for deceased person’s share.

Having Keyman Insurance is a very effective arrangement as most of the organisations do not have their assets in cash to take care of such contingencies and moreover, surviving partners may not wish to do business with deceased partner’s spouse and vice versa.

How we can help you

New Age Insurance Brokers is a fully-licensed (by the U.A.E. Ministry of Economy) insurance brokerage and represent many local and international companies of repute.  We will assess your need and place your coverage in the most cost-effective way.  If warranted, we may place business with one or more companies.

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