Protect your business from the loss of a key employee


Key Person Insurance 

Key person insurance is an important form of business insurance. There is no legal definition for "key person insurance".

In general, it can be described as an insurance policy taken out by a small or medium sized business to protect that business from potential financial losses that could arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business.

The aim is also to help protect the profits and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but provides a fixed monetary sum as specified on the insurance policy upon the insured person either dying or suffering a critical illness as defined in the insurance policy terms & conditions.

An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.

who can be a key person?

A key person can be anyone directly associated with the business whose loss can cause financial strain to the business.

For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company.

taxation aspects

Based on a set of principles laid down in 1944 by the then Chancellor of the Exchequer, Sir John Anderson, the premiums paid will be allowed as a business expense for corporation tax purposes provided that:

  1. The only relationship between the proposer and the life assured is that of employer and employee (except in the case of shareholding directors - see point 4 below).
  2. The policy is designed to cover loss of profits only.
  3. The policy's term does not extend beyond the period of the key person’s usefulness to the business.
  4. The employee does not hold a significant shareholding (less than 5% is probably insignificant).

If the premium is a permitted allowable expense, then the policy proceeds would normally be subject to taxation. However, there are no hard and fast rules regarding the tax treatment of premiums and benefits, and each case should be referred to the local Inspector of Taxes for guidance.

It is not the case that if the business decides not to apply for tax relief on the premiums, any proceeds will necessarily be tax-free. The taxation decisions rest with HM Revenue & Customs, and there are reported cases where the Revenue has taxed benefits on which the premiums did not obtain tax relief.

However, such policy proceeds should usually escape tax, unless the proceeds are payable in instalments. As above, each case should be referred to the local Inspector of Taxes for guidance before the policy is implemented.

It is therefore very important that the effects of taxation should be considered when setting the sum assured on key person cases.

These types of plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

Information regarding taxation levels and basis of reliefs are dependent on current legislation and individual circumstances, are not guaranteed and may be subject to change.

why work with me?

Working with me for key person insurance provides a number of benefits. I can provide tailored advice and solutions to fit your specific needs, guided by industry best practices.

I also offer competitive premiums and access to exclusive products that can help you get the most value out of your policy.

Additionally, I provide excellent customer service and a hassle-free process, so you can rest assured that your claim will be handled in a timely manner.

Critical illness cover as part of Key person Insurance

Losing a key employee can be an incredibly difficult situation for any business. Not only do you have to experience the loss of someone much loved, but there's also significant financial strain as well.

 According to research conducted by Legal & General, more than half of small businesses would close if they experienced this kind of tragedy.

 But what could make it even worse? If you need to recruit and train a replacement staff member quickly - on top of existing medical fees!

The cost gets higher still when hiring specialised personnel; agency fees tend be 25-100% more expensive in these cases...protecting your practice with Critical Illness Cover is vital for times like these.

This article (Key Person Insurance) is intended to provide a general appreciation of the topic and it is not advice. For more information please email and we will be happy to assist you.

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