Businesses in the Gulf countries need to pursue Keyman Insurance to retain key professionals who make a difference in running businesses efficiently and deliver profits year after year, according to a top industry official, who urges Keyman Insurance to become a mandatory requirement for securing bank loans.
Keymen or key professionals play a crucial role in running the business and deliver profits every year. Business owners depend on them in order to run the businesses efficiently. It is therefore important to retain them on payroll and Keyman Insurance could help the businessmen mitigate the risks.
Keyman Insurance could play a vital role in ensuring business continuity and profit sustainability in the Gulf region, especially during challenging environment, especially like the current COVID-19 crisis.
Keyman or Key Person Insurance is a life insurance policy that a company purchases on a key executive’s life. The company is the beneficiary of the plan and pays the insurance policy premiums. This type of life insurance is also known as ‘keyman insurance’, ‘key woman insurance’ or ‘business life insurance’.
Be it a small business or a large company, keyman insurance provides quite a few advantages. In case of death of the employee, the company receives the sum assured to cope with the loss and also ensures business continuity without any hiccups.
The policy contributes to the company’s tax planning – premium allowed as business expense. Options such as recruiting and training capable employee replacements, handling debt and liquidation of the company, or even successfully selling the company are all within reach when a business is covered by Keyman Insurance.
In an expatriate dominated private sector, where most key professionals are skilled and talented foreigners who keep moving from one company to the other for better prospects. This affects businesses who rely on them, be it the Chief Executive Officer, Chief Operating Officer, Chief Information Officer, Chief Marketing Officer or Chief Sales Officer – who all play key role in shaping a company’s business and are collectively responsible for the delivery of profits year after year.
“Keyman Insurance is an important form of business insurance. It can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business,” Leena Parwani, Founder and Chief Executive Officer of LPH Financial Services, says. “Keyman Insurance is very affordable and cost effective. The annual premium of a Keyman Insurance policy is much less than 1 percent of the cover amount. Depending on the age, lifestyle and health condition of the insured, it can be higher or lower as well.
“If one carries out a cost-benefit analysis, one would see that the benefits of the Keyman Insurance far outweigh its costs.
“To put it simply, key person insurance is a standard life insurance or trauma insurance policy that is used for business succession or business protection purposes. The policy’s term does not extend beyond the period of the key person’s usefulness to the business.
“Keyman Insurance provides business owners who rely on good corporate professionals a great peace of mind; immediate financial security for the family of the keyman; incentive for the Keyman to continue with good works and perhaps the best retirement gift for the key professional.”
Keyman Insurance is important, particularly for family businesses that are highly dependent upon a few individuals. It helps ensure that the business can absorb the financial strain of an early death and continue sustainably. The low cost and ease of securing a Keyman Insurance policy makes this very important business decision a simple one.
Key person policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified in the insurance policy.
Many businesses have a key person who is responsible for the majority of profits or has a unique and hard to replace skill set such as Intellectual Property that is vital to the organisation. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company.
In many developed countries, Keyman Insurance is a mandatory requirement for bank borrowing, to ensure that the company sustains business in the absence of the keyman.
“The Gulf countries should also make this a mandatory requirement for loan disbursement, to ensure that the company runs smoothly even if the keyman leaves the company,” Leena Parwani says. “This will give the banks a relief that their money is in safe pair of hands and reduce the risks of lending to a family-owned business.”
The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.
There are four categories of loss for which key person insurance can provide compensation. These include and not necessarily limited to:
1. Losses related to the extended period when a key person is unable to work, to provide temporary personnel and, if necessary, to finance the recruitment and training of a replacement.
2. Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialised skills or knowledge.
3. Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners. Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.
Lack of proper business succession could cost an estimated US$1 trillion worth of business assets in the Middle East in the next ten years, according to the Gulf Family Business Council. If business owners take this seriously, they would try to ensure business continuity and protect the business by securing Keyman Insurance.
In the Middle East, family businesses play a particularly significant role in the region’s economy so business continuity, profit sustainability are crucial of national economy. With a GDP contribution of 60 percent, a workforce contribution of 80 percent, and US$1 trillion estimated to pass from one generation to the next within a decade, the survival, growth and sustainability of family businesses that rely on professionals are key to the region’s economic growth.
Leena Parwani, who started her financial services practice in 2013, has been one of the UAE’s top financial consultants for the last seven consecutive years, serving large corporations, entrepreneurs and business leaders.
Her company LPH Financial Services offers financial consultancy on personal wealth protection, estate planning, succession planning against potential risks to individuals and companies against various kinds of loss or damage.
