Key person insurance protects businesses from the loss of essential employees. Coverage for business disruption and replacement costs.
Key person insurance protects your business from the financial impact of losing essential employees. It provides funds to maintain operations and find suitable replacements.
Small businesses are especially vulnerable to losing key personnel. Key person insurance provides the financial cushion needed to survive the transition period.
This coverage is often required by lenders and investors who want to protect their investment in businesses that depend on specific individuals.
A key person is anyone whose absence would significantly impact your business operations, revenue, or profitability. Identifying these individuals is crucial for proper coverage.
Consider anyone whose loss would require 6-12 months to replace and whose absence could cost your business significant revenue.
Determining the right coverage amount requires analyzing multiple factors to ensure adequate protection without overpaying.
A Kenyan tech startup CEO earning KES 3M annually, generating KES 15M in revenue, with KES 5M in business loans might need: KES 3M (salary) × 2 years + KES 2M (replacement costs) + KES 5M (debt) = KES 13M coverage minimum.
Key person insurance premiums in Kenya vary based on coverage amount, the insured person's age, health status, and occupation risk level.
When a key person is lost, insurance proceeds provide financial flexibility to navigate the transition. Understanding permitted uses helps maximize the benefit.
Unlike personal life insurance, proceeds belong to the business and should be used to ensure business continuity and stability.
Understanding the tax treatment of key person insurance is essential for proper financial planning and compliance with KRA regulations.
In Kenya, key person insurance premiums are typically NOT tax-deductible as business expenses. They're treated as capital expenditure protecting an asset (the key person).
Death benefit proceeds received by the business are generally tax-free and not subject to corporate income tax. However, if the policy has cash value or is surrendered, gains may be taxable.
While key person insurance is valuable, consider these alternatives or complementary approaches to comprehensive risk management.
Partners or co-owners purchase life insurance on each other. Proceeds allow surviving owners to buy out deceased partner's shares without business disruption.
Covers ongoing business expenses (rent, utilities, salaries) if a key person becomes disabled. Complements key person life insurance for comprehensive protection.
Develop detailed succession plans, cross-training programs, and documented processes. Reduces dependency on any single person and speeds up replacement.
Build a cash reserve fund equivalent to 6-12 months of operating expenses. Provides immediate liquidity while insurance proceeds are processed.
How you structure key person insurance affects control, tax treatment, and payout flexibility. Choose the right approach for your business.
Company owns the policy, pays premiums, and receives proceeds. Most common structure. Provides maximum control and direct access to funds.
Key person owns the policy; business pays premiums as taxable bonus. Used when key person wants portability or additional personal coverage.
Policy ownership and proceeds split between business and key person. Complex but can serve dual purposes (business protection + executive benefit).
Understanding how Kenyan businesses use key person insurance helps illustrate its practical value across different industries.
A fintech startup with a brilliant CTO leading product development secured KES 15M in key person coverage. When the CTO unexpectedly passed away, the proceeds:
A family-owned manufacturing company insured their founder (age 55) for KES 25M. When he died suddenly, the insurance proceeds:
A consulting firm with a star partner generating 60% of revenue held KES 8M coverage. When she left to start her own venture (not a death claim), the business:
Yes. Most businesses insure 2-5 key people with separate policies for each. This allows different coverage amounts based on each person's value and makes policy management easier if someone leaves.
You typically have three options: (1) Cancel the policy and recover surrender value if any, (2) Convert it to the departing employee's personal policy (they pay future premiums), or (3) Keep it active and change the insured to their replacement.
Standard key person life insurance only pays on death. However, you can add disability riders or purchase separate key person disability insurance that pays if the insured becomes unable to work.
In Kenya, most insurers process death claims within 30-60 days after receiving all required documentation (death certificate, policy documents, claim forms). Having proper documentation ready speeds up the process.
For coverage above KES 5M, most Kenyan insurers require a medical examination. Smaller policies may only need a health questionnaire. The exam is typically paid for by the insurance company.
Yes, you should review coverage every 2-3 years. As your business grows, key person value increases. You can increase coverage (may require new underwriting) or add additional policies. Some policies include guaranteed insurability riders.
Maximize the value of your key person insurance with these proven strategies from business insurance experts.
Insure key people in their 30s when rates are lowest. Premiums increase 8-12% with each decade of age. A 35-year-old pays significantly less than a 45-year-old for identical coverage.
Keep records proving the person's value: sales figures, client relationships, specialized skills. This justifies coverage amounts and helps with underwriting. KRA may also request this documentation.
Term life insurance costs 60-80% less than permanent coverage. Unless you need cash value accumulation, 10-20 year term policies offer better value for most businesses.
Key person insurance complements but doesn't replace personal life insurance. The business gets key person proceeds; families need separate personal coverage for income replacement.
As revenue grows, so does key person value. Schedule annual policy reviews to ensure coverage keeps pace with business growth. Undercoverage defeats the purpose of protection.
Choose brokers experienced in commercial insurance, not just personal policies. They understand business valuation, succession planning, and can structure optimal coverage.
Many Kenyan insurers offer discounts when you bundle key person insurance with other business policies (property, liability, group health). Ask about multi-policy discounts.
Be transparent with insured employees about the coverage. It demonstrates their value to the organization and can serve as a retention tool, showing your investment in business continuity.
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