What is key person insurance - How much is it and who should get it?
What is key person insurance?
As a business owner you will be used to implementing health and safety rules in your work place, supplying first aid boxes and putting up warning signs of any hazards to help protect your staff from injury. As a Key Person / Director, most businesses would not survive without its senior staff this is where extra measures can be taken beyond basic health and safety.
Research by leading provider Legal & General, states that almost half of businesses would close if a key person within the company became critically ill or died. It is hard to put any warning system in place for such events however a business can implement additional protection called Key Person Insurance (also referred to as Key-man cover). This type of insurance protects any businesses potential loss of profits, repayment of loans or even helps with costs of replacing a staff member or Director who is crucial to their position.
What does key person insurance cover?
Senior staff are typically defined as somebody
who is crucial to the financial success of a
company. This is sometimes hard to define, but
could be a business founder, a top sales
person or someone with niche skill set like a
website developer. Similar to a Life Insurance
policy it will pay out if that person/group of
people pass away or become critically ill (if
critical illness cover is included).
This payment
is then used to cover the costs of finding
replacement staff/Directors or can replace loss
of profit.
If a business is requiring bank loans key
person insurance may also need to be
included, as this gives the lender reassurance
for the return of payment. Key Person
insurance can also provide a payout in the
event of a critical illness or long-term disability.
There is also Key Person income protection
which can help fund a salary.
How does key person insurance work?
Premiums are calculated on age, health and lifestyle, with the business paying
the premiums and being the beneficiary of payouts. The cost will depend on
how long the policy is taken out for (term), as well as the level of cover
required. The amount of protection taken is usually, either a multiple of the
salary or the profit/turnover they create and how long it would take to recover
or alternatively the cost of replacing the staff.
Is key person insurance tax deductible?
In general, if you get tax relief on the premiums then the payout will be taxed
as this will boost profits pushing up your corporation tax liability. If the
business decided not to receive tax relief then it is likely the payment would be
treated as capital rather than profit so won’t be taxable. Advice given would
always be to check with HMRC or a certified accountant, as it is down to
HMRC’s interpretation of any liabilities that could be due from a payout.
When should you consider key person insurance?
Key Person Insurance provides businesses with
continuity. There are plenty of circumstances where
you should consider Key Person Insurance, when
starting out you may be reliant on a key group of
individuals or for more established businesses may
need particular staff with particular skillsets. As a
business owner you will find staff are an essential cog
to any successful company, So losing a key team
member can have detrimental effects on profitability
and can cause a degree of uncertainty.
Small businesses would normally have an influential
founder, whose ideas and leadership may be lost on
departure, with key salespersons losing this generated
revenue may not be easily replaced. Having Key
Person Insurance can alleviate any uncertainty of a
loss of an individual/group and will ensure the
business can continue to operate limiting any
disruptions. For many company owners this should be
part of any business plan.
How much does key person insurance cost?
Costs of premiums can vary from providers offering
these types of insurance. The amounts payable by the
business will be similar to Life Insurance on the
individuals being covered as well as the level of
protection required. An estimation of how much profit
would be lost, how much it would cost to find a
replacement and any other potential losses to the
business would need to be calculated. The level of
cover you have the more the premiums would cost the
company. A consideration would also have to be made
that if the individual left the business premiums
would still be ongoing however in this situation the
insured individual can usually takeover the product
and mange this themselves.
There are lots to discuss and factors think about when
searching for Key Person Insurance for example who to
cover, the costs involved and for how long should
premiums be paid as well as considering any of the
tax liabilities. As with all financial products, Key Person
Insurance providers will vary on rates and the terms
conditions of the contract, so searching the whole of
the market is important when receiving a quote for
your business.
