Key Person Cover

A key person is any member of staff, within a business, that has a direct impact on business profits. They could be a business owner, director or any employee with specialist skills. Key person cover is life insurance taken out by a business on the life of a crucial person. It can include critical illness for cancer, heart attack and stroke, as well as many other conditions, depending on the insurer. The policy is paid directly to the company or partners upon the passing of the key person.

When a business suffers the loss of a key person, the business may need to:

  • Recruit a suitable replacement
  • Replace lost profits
  • Protect debts
  • Cover salaries, dividends or loaned money through a director’s loan account
  • Pay penalties for non-delivery or late delivery on goods and services
  • Payback a business loan

 

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Disclaimer

Please note: It is important to remember that the decision regarding the tax treatment of key person cover ultimately rests with the local Inspector of Taxes.

How much cover can we get for our key person?

 

The amount of cover you can get will vary depending on the insurer you choose, as well as the individual circumstances of the business.

The amount can be calculated in various ways:

Multiple of Profits | To protect business profits – this method calculates the amount of cover based on their contribution to profits. The formula routinely uses an average of the last two years profit figures.

Multiple of Salary | To cover replacement/recruitment costs

Loan Security | To pay off debt associated with the business

Business Start-ups | This will take specialist calculations to quantify the key person(s) involved

Our protection advisers will guide your business through the potential requirements in respect of the businesses protection needs (e.g., loss of profits, recruitment costs etc.). It is expected that your business will arrive at the final figure, typically in conjunction with your tax or legal advisers. Most insurers will require evidence of any calculations in the proposal form to ensure that there is satisfactory ‘insurable interest’.

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What happens if the key person leaves or retires?

If a key person leaves or retires before the end of the key person protection policy term, the business could do one of the following:

  • Stop paying the premiums and the policy would then lapse.
  • Continue paying the premiums until the end of the policy term and in event of a claim, the business would receive a capital sum.
  • Assign the policy to the key person who then would become the legal owner of the policy and could then continue paying the premiums.

 

Where a partner is a key person and the policy is written in trust, the policy would automatically revert to the key person.

The taxation of this can be complicated, for both the company and the life insured. National Insurance, Capital Gains Tax may all need consideration.

We strongly recommend that you seek specialist advice.

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Disclaimer

Please note: it is important to remember that the decision regarding the tax treatment of key person cover ultimately rests with the local Inspector of Taxes.

 

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