Key Person Cover
Key person insurance is also known as Key man insurance and it provides financial stability in the event of a key member of staff dies or becomes critically ill.
Although all members of staff are important for a business to run successfully, there are key members or staff in all companies who directly impact the profits of the business. For example, the company director, business owner, sales staff or an employee with particular knowledge and expertise.
It is those who have a direct impact on a business’ profits that need to be insured to protect against any loss that may be incurred in the event of their death or diagnosis of a critical illness. The loss of a key person may not only have short term affects but could also have significant long-term effects on the business’ success.
What needs protecting?
In the event of a key employee’s death there will be many new financial demands that will need to be met to ensure that the business can continue as planned. Some of these costs are:
- Recruitment costs to find an adequate replacement
- Loss of profits during the period of time nobody is working in the position
- If the employee suffers a critical illness any costs associated with company sick pay
- The cost of paying the key persons salary
As well as protecting the stability of the business’ profits, it is also important to consider the company’s ability to repay any debts that may be owed:
- Outstanding business loan balances
- Repaying Business Overdrafts
Key Person cover should be set up to protect either Business Debt or Business Profits. HM Revenue & Custom have different rules on taxation for each of these areas therefore, these policies should always be set up separately.
Premium Tax relief is not available on policies set up to protect Business Debt.
If the policy should be set up to protect business profits, then tax relief is available on the policy premiums. However, the term of the policy should coincide with the period of time that the employee is key to the business for. The life insured must also be an employee or a shareholder with a share less than 5%.
It is important that anyone taking out a key person policy consults with an accountant to establish if any premiums qualify for Tax relief and if the proceeds of any policies are tax deductible.