Perspective

Why Keyman Insurance Is Usually Sized Wrong

Most keyman cover is bought once, at a number that made sense at the time, and never revisited. Years later, the business has changed. The policy has not.

Keyman insurance exists to cover a specific loss: what happens to a business if a key promoter, founder or executive is no longer there to run it. In practice, the sum assured behind that cover is rarely tied to that loss in any defensible way. It is usually a round number, set by whatever limit an insurer offered at the time, or a figure carried over from an earlier, smaller version of the business.

This is not unusual. It is the default outcome of how keyman cover typically gets bought: as a single transaction, at a single point in time, disconnected from the ongoing planning that actually determines whether the cover still makes sense.

The Core Problem

Sum assured drifts out of date faster than anyone notices.

A business that has doubled in enterprise value since a keyman policy was purchased has, in effect, halved its real cover. No renewal notice flags this. The premium keeps getting paid, the policy stays in force, and the gap between what the cover pays out and what the business would actually need widens quietly every year.

The same drift affects who the cover is meant to protect. A keyman policy taken out for a business's original two founders often stays untouched after a third joins, after an outside investor takes a board seat, or after operational control shifts from one generation to the next within a family business. The policy answers a question about the business that no longer matches the business as it exists today.

Beyond The Number

Structure and ownership matter as much as sum assured.

Even where sum assured is roughly right, the structure around it is frequently not examined at all. Who owns the policy, who is named as beneficiary, and how the payout is meant to be used are three separate questions, and a policy can get any one of them wrong while looking, on paper, entirely in order.

A payout meant to fund a buy-sell agreement is only useful if it is actually structured to align with that agreement, rather than paid to the company or the family with no defined use.
A policy meant to protect a lender's position, as collateral for a loan covenant, needs beneficiary and assignment structured accordingly, not left as a generic company-owned policy.
Multiple keyman policies across group entities can overlap in ways that duplicate cost without duplicating protection, or leave a specific entity with none at all.

What This Means In Practice

A periodic review is the actual fix, not a bigger policy.

The honest fix for most of this is not more insurance. It is a periodic, structured look at what already exists: whether sum assured still reflects current enterprise value, whether ownership and beneficiary structure still match how the payout is meant to be used, and whether the list of people covered still matches the people actually running the business. This is the kind of review that rarely happens on its own, because no one is naturally prompted to run it. A policy renewal notice asks for a premium payment, not a rethink.

This is also, structurally, why an audit-led review sits apart from the process of buying cover in the first place. Sizing and structuring keyman insurance correctly is a question worth answering independently of who ends up placing the policy.