KEY PERSON INSURANCE

KEY PERSON INSURANCE

What is key man insurance?


Key Person insurance is sometimes referred to as ‘Key Man’ and is designed to allow a company to protect the business in the event that a 'key' employee in unable to work or dies. Creditors may panic, clients may lose their confidence, and banks may call in their overdrafts thinking that the business may not be in a position to pay back its debts. The loss of a key member can incur other costs too. For example, loss of profits, recruitment of a new member of staff could take months, and retraining could also be a costly process. At a time like this, businesses will benefit greatly from a lump sum becoming available to cover these outgoings until their cash flow stabilises. It is vital that businesses have the funds in place to make this possible.


A Key Person protection policy is life insurance which can also have critical illness cover attached and taken out by the business. A Key Person could be a director, manager, chairman or anyone without whom the business would suffer. Unlike a personal life insurance policy, the business pays the premiums, and it is the business which receives the lump sum benefit should it be required.


Things to consider:


Sole employee


Key Person insurance is not necessary if you are the one and only employee of the company. In this case, personal life insurance would be sufficient as you do not have any employees dependent on the business should the key person pass away.



Level of cover


The level of cover your firm requires depends on the size of the business and their assessment of their short term needs. However it is important that you assess you level of cover correctly. It would be inefficient to over insure, and similarly, if the level of cover is not sufficient, it could leave the company in a dangerous situation should the worst occur. Many factors should be considered such as how long it is before the key person retires, whether you would like cover for lost profits, and the value of the loans taken out by the business which may need covering. There are various methods for calculating how much cover is needed by a firm. It may be worth talking to an expert to assess this for you.


A policy term can be in full years, i.e. 5 or until the life covered reaches a specific age. There are various options that can be part of your policy design, which include guaranteed premiums or increasing in line with inflation.



Tax relief on premiums


Premiums on life policies taken out by employers for Key Person protection will be allowable deductions and get tax relief if:


  • The sole purpose of taking out the policy is to cover potential loss of trading income (not capital loss or security for a loan) from the loss of a key employee.

  • There's an employee/employer sole relationship between the person covered and the company that will benefit from the policy and there is no investment element.


Tax on claim proceeds


If HMRC gives tax relief on premiums, it will normally tax any money from the policy as a trading receipt. If HMRC does not give tax relief, it will decide how to tax any money from the policy but won't generally tax it as a trading receipt.


It must be remembered that U.K. taxation law is subject to Government legislation and can change in the future. It is recommended that you consult your local tax professional to confirm tax treatment.


In conclusion, your business would benefit from the safety net that Key Person cover brings to a business. We cannot predict the future and without the necessary back up, the loss of a key employee could have disastrous effects on a business you've worked so hard to build.

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