People like the director who wins new clients. The researcher who develops innovative products. Or the manager who runs the business operations.
How would your business cope without its key people?
The financial impact of losing a key member of your team can be significant. That’s why having insurance to protect your business is so important.
What Key Person Insurance is and Why You Need It
What would you do if one of your company’s key directors, shareholders or employees became critically ill or died?
As much as no one wants to think about it, these events are a fact of life. As well as the personal impact, they bring uncertainty for your business.
This could mean customers losing confidence in the business, banks calling in loans or suppliers asking for payment upfront.
However, whilst people are a critical asset many business owners only think about insuring their premises, plant or equipment. Even though it’s much harder to replace an essential member of your team or business.
That’s where Key Person Insurance can help.
This type of cover protects your business if you lose a key person due to death or disability. It helps you to keep the business going and fund a replacement should the worst happen.
Who Are the Key People in Your Business?
A good way to decide who you want to cover is to think about anyone who makes a significant difference to the financial success of your business. This could be because of their skills, knowledge, experience or leadership.
Whilst the people you chose to cover can be shareholders, the size of shareholding is not the only way to identify key people. Non-shareholders can have a major impact on the performance of the business.
As a result, key people can be owners, directors, sole traders or staff members. Depending upon your business, those most important to the profit of your business could also be sales managers, R&D staff, technical experts amongst others.
How is Key Person Insurance Calculated?
There are different ways to calculate the level of cover for Key Person Insurance. Speak to your financial advisor to confirm which is most appropriate for your situation:
Multiple of Profits
This is a common way to assess a key person’s worth because the cover aims to protect the profitability of the business. If you’re insuring more than one person, the multiple of profits will have to be split based on their contribution.
Multiple of Salary
An alternative method is to use a multiple of the gross salary (inc. benefits in kind) of your key people to cover the cost of a replacement. However, for shareholders, this may not reflect their full value to the business.
Proportion of Payroll
The proportion of payroll method looks at the key person’s contribution to company turnover. It multiples their proportion of the payroll, by turnover and the number of years it will take to recruit and retain a replacement.
What is the Tax Position for Key Person Insurance?
The tax position with Key Person Insurance for your company will depend on the practice of the local inspector of taxes and the specifics of your situation.
Generally, if a company makes a claim the payouts will be taxable and the premiums tax-deductible when the person insured is an employee, the insurance is to cover the loss of profits when a key person can no longer provide their services and it is annual or short-term insurance.
However, it’s always best to seek written guidance from your local inspector of taxes.
Other Ways to Protect Your Business
There are other steps you can take to protect your company from the business impacts of losing an important colleague or partner. Like Key Person Insurance, they help to reduce uncertainty for your business:
A shareholder protection insurance plan funds the purchase of a deceased owner’s share of the business. This helps to avoid a lack of clarity when a shareholder becomes critically ill or dies.
Business Loan Protection
Business loan protection gives you peace of mind that business debts are covered if a business owner, director or key person dies.
Protect Your Profits with Key Person Insurance
Losing one of your key people could have a major impact on your business.
So it’s better to plan ahead about how you would deal with this. Key Person Insurance can help you protect your business from the loss of profits due to the death or disability of a significant member of your company.
Protect the profits of your business by insuring against the loss of your key people. Call us on 0345 224 3175 or email us on email@example.com to book your appointment.
Please note: tax reliefs referred to, are those currently applying, and are liable to change