Key Person Insurance Advice

What would happen if a key member of your team became seriously ill or passed away? The cost to your business can be significant, including loss of productivity and the costs involved in hiring a replacement and getting them up to speed.

While most business owners would never leave their premises and equipment uninsured, far too many employers fail to get cover against the loss of key people, even though this can be just as harmful to your business as damage to physical assets, if not more so.

Effective business risk management relies on successful identification of risk and putting in place appropriate strategies to mitigate those risks. Our team are highly experienced in this area, so can offer clear, realistic advice on insuring key people within your organisation, so you are protected against the unexpected loss of critical team members.  Key person insurance does not indemnify the actual losses incurred, but compensates with a fixed monetary sum as per the insurance policy

We can review your business and its needs, then advise you on who you should be insuring and what level of insurance you need. We can also review key person insurance documents to make sure you fully understand the terms and that these match your requirements.

How we can help you with key person insurance planning

Our business planning team can help you get the most out of key person insurance with experienced guidance on issues including:

  • Which key people to insure
  • How to place a value on the key people within your business
  • Drafting & reviewing relevant documentation
  • Tax liability & tax relief on premiums & pay outs to and from your policy
  • Advice on related issues, including business succession planning

We will take the time to get to know you and your business, so you can be confident that the advice we offer is always shaped to your unique requirements and overall commercial goals.

Clients often ask us……

How does key person insurance work?

In simple terms, key person insurance is a type of life insurance and critical illness cover businesses can take out with respect to key employees and stakeholders. The policy's term will not extend past the period of the key person’s usefulness to the business.

The easiest way to show you how this works is to run through an example.

If you have a key member of staff, that you are paying £50K a year, if that member of staff was ever unable to work, you would need at least £60K to hire someone else and pay the national insurance. You may also need recruitment fees, or training costs to get someone up to scratch.

Additionally, if that employee was responsible for around £200K of turnover for your firm, you might want to consider insuring that too.

It’s more complicated than this, but that staff member might be insured for £275K to ensure that if something unfortunate happened, your business wouldn’t suffer.

Who do I need key person insurance for?

This will depend entirely on the composition and needs of your business. We can help you think about issues such as how losing different team members would affect you, both in the short term and long term, how easy those people would be to replace and what financial impact their loss would have.

As a general guide, the types of people you may wish to insure against death or critical illness include:

  • Directors
  • Senior executives
  • Managers
  • Technical specialists
  • Anyone else whose skills and/or experience make them particularly valuable and hard to replace

How is key person insurance taxed?

Key person insurance premiums are generally tax deductible as long as certain criteria are met.

To qualify for corporation tax relief on key person insurance premiums, the policy will need to be for loss of trading income related to the loss of the relevant key person and, for life insurance policies, be term-limited i.e. only cover the death of a key person within the term of the policy.

If you need to make a claim against your key person insurance policy, any lump sum you receive will be paid tax-free to your business, but the funds will then be liable for tax in exactly the same way as any other funds received by your company.

Speak to our key person insurance advisers now

Looking for seasoned business planning advice on issues such as key person insurance in Lincolnshire, Nottinghamshire or London?

Please contact your local Chattertons office to arrange an appointment:

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