Ask yourself: if the most important person in your business disappeared tomorrow, could the company carry on? That question is the starting point of keyman insurance, a risk management tool that Thai business owners are discussing more and more. This article explains simply what it is, who it suits, and what to watch out for.
What keyman insurance is
Keyman insurance is life insurance in which the company holds the policy and pays the premiums, covering a person essential to the business — the owner, a managing director, or any employee whose absence would materially affect the company's revenue and operations. Put simply: ordinary life insurance protects our family; keyman insurance protects the business from losing someone it cannot do without.
Why a business would want it
A great many businesses, SMEs especially, have "one person who knows everything" — the one who holds the relationship with the major client, the only one with the professional licence, or a founder who is sales, production and finance all at once. If that person dies or becomes disabled suddenly, the effects arrive in a chain:
- Revenue stops immediately, while fixed costs continue every month.
- Creditors and banks may grow concerned, and the company's credit becomes shaky.
- Clients and partners hesitate over renewing contracts.
- Finding a replacement takes both time and money.
The lump sum from keyman insurance acts as the business's oxygen during that crisis, giving the company liquidity to pay debts, pay salaries, maintain confidence, and buy time to find a successor or restructure — without having to rush into selling assets or closing.
An illustration (hypothetical figures)
A contracting company has revenue of 20 million baht a year. Almost all of its work comes through the relationships and engineering licence of A, the founder. The company has a 5-million-baht bank loan and 15 employees.
One day A dies in an accident. With nothing prepared, the company may have to stop taking new work immediately, while salaries of several hundred thousand a month and the loan instalments continue. A business built over ten years may not survive a few months.
But if the company holds keyman insurance on A with a sum insured of 10 million baht, that money arrives as immediate liquidity: 5 million clears the bank loan, and the remaining 5 million funds salaries and running costs for around a year — buying time for the remaining management to find a new licensed engineer, negotiate with clients, and keep the business going. All of these figures are purely illustrative, to show the mechanism. The right sum insured differs for every business.
Tax points (in principle)
This is the part business owners are most interested in, and also the part requiring the most care.
In principle, keyman premiums paid by the company may be treated as a company expense if they meet the conditions the Revenue Department sets — such as the payment being made in accordance with the company's regulations and resolutions, the insured person's relationship with the business, and consistent general practice [check the Revenue Department's current criteria].
At the same time, on the insured person's side (a director whose premiums the company pays, for instance), the premium paid on their behalf may be counted as that person's income, and the benefit the company receives when a covered event occurs has corporate tax implications that must be considered [check the Revenue Department's current criteria].
To be clear: the tax effect of keyman insurance depends on the law in force and on each company's facts. There is no off-the-shelf formula that works for every business. Before deciding, consult your company's accountant or auditor and always verify the practice with the Revenue Department directly.
Advantages from the business's point of view
- Managing people risk — closing the most fragile point of a business that depends on individuals.
- Liquidity at the right moment — the money arrives exactly when the business is most fragile, without selling assets or borrowing more.
- Possible tax benefits, subject to conditions — where the structure is set up correctly [check the Revenue Department's current criteria].
- Added confidence — some banks and partners see a plan covering key-person risk as a sign of a well-managed business.
Disadvantages and limits
- A continuing premium cost — a long-term expense the company must genuinely budget for.
- The tax conditions must be met completely — if the structure or the documentation is not in order, the expense may not qualify, and retrospective tax issues can follow.
- Supporting documents are required — board resolutions or company regulations clearly providing for this; it is not simply a matter of buying a policy.
- Cover and benefits follow the conditions of each particular policy.
Techniques and cautions to get the most from it
- Set the policyholder and the beneficiary correctly according to the real purpose of protecting the business, because that structure has both legal and tax consequences.
- Complete the documentation from the outset — the board resolution, the company regulations and the premium payment records should all be consistent and kept ready for inspection.
- Choose a sum insured matching that person's value to the business — consider the profit they generate, the company's debts, or the cost of replacing them, rather than picking a number out of the air.
- Review periodically — as the business grows, debts change, or the key person's role changes, the sum insured and the structure should change too.
- Consult specialists on both sides together — an insurance agent for the plan and the cover, and an accountant or auditor to get the expense and tax treatment right. Working together from before the purchase is safest.
In short: who keyman insurance suits
Keyman insurance suits businesses whose revenue or operations depend significantly on one individual — particularly SMEs where the founder is the heart of the business, businesses whose debts are tied to a person, or firms requiring someone with a specific professional licence. If you have read this far and immediately pictured the face of your own company's indispensable person, that is the signal to start looking into this seriously.
Disclaimer: this article is general information only and is not tax or legal advice for any particular case. The accounting and tax consequences of keyman insurance depend on the law in force and on each company's specific facts. Please consult an accountant or auditor and verify the criteria with the Revenue Department before proceeding. Insurance cover and benefits follow the conditions stated in each policy.
If you would like to know what kind of planning suits your business, message us on LINE any time — happy to look at the overall picture first, at no charge and with no obligation.