Keyman Insurance

Key people are those individuals whose skill, knowledge, experience or leadership contribute to the continued financial success of the business.

In many cases this could be the chairman, managing director or employee with specialist skills although it could be anyone whose death or critical illness could lead to financial loss for the business.

Key Person Protection could provide your business with the cash injection it may need to help recover from this loss of profits, covering costs such as the recruiting and training of a replacement.

Often a person's value to the business is reflected in their remuneration package, but whatever their function or responsibility their loss could have disastrous consequences for the business. Some of these may include:

• Loss of profits
• The need to recruit or train a replacement
• Loss of important personal or business contacts
• Difficulties in meeting existing loan repayments
• Loss of confidence from suppliers and customers
• Difficulties in raising finance for new developments
• Loss of detailed knowledge of the businesses processes and systems
• Having to repay a loan the key person has made to the business
• Loss of goodwill

Business protection takes three key forms; protecting profits, corporate debt and ensuring the shares of a deceased business owner can be purchased.

The success of almost all SMEs are dependant upon a handful of key individuals. The loss of one of these key people could be the beginning of the end for the business. A number of the larger UK insurers have thus created a range of products to help protect youe business against such a loss.

A lump sum payment should the key person pass away or become terminally ill during the term of the cover.

A lump sum payment if the key person is diagnosed with one of a list of defined critical illnesses during the term of the cover.

A lump sum payment should the key person either pass away, become terminally ill or suffer one of a defined list of critical illnesses during the term of the cover.

A monthly income if the key individual is unable to undertake their role due to illness or injury during the term of the cover.

A 2011 study by Legal & General carried out with the Institute of Directors took place to understand the security of assets, shares and cash flow of businesses with some of the highlights detailed below.

• 95% of businesses had at least one key individual.
• 38% of business owners expected their business to fold within 18 months of the death or critical illness of a key person.
• 58% of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner.

This will depend on the type of cover in question, generally speaking the level of cover will reflect the cost to the business in terms of profits and associated costs in losing the key person.

In the case of a sales director the total cover may equal the amount of profit typically generated by the sales director, additional costs can also be covered including the costs associated with the replacement of the director such as recruiting and training another individual to the same level as the lost key person.

When it comes to key person protection policies there is no direct legislation on the topic which means you should always consult your inspector of taxes to ensure the correct treatment of any premium and benefit payment.

As a general guideline there tends to be a tax liability either on the way in or the way out with any protection insurance policy. What we mean by this is if tax relief has been allowed on the premiums then any benefit payable would be taxable.

If the premiums have been taxed at the outset then any benefit payable is likely to be paid tax free. This is a very broad and general statement and much will depend on the judgement of the local tax inspector.

A trust is often set-up to ensure any benefit payment is distributed to the beneficiary as quickly as possible, it is also used to ensure a benefit payment does not form part of estate of the deceased and thus result in a potential Inheritance Tax Liability (IHT).

A key person protection plan is an insurance policy paid for by the organisation on the life of the key individual. Where the business is a company, LLP or Scottish partnership given the nature of the relationship between the business and the key individual a trust is not typically needed. The protection policy is often simply set-up on a 'life of another basis'.

This overview will provide you with a high level understanding of the importance of protecting your business and it's key individuals. Should you require further information, advice or guidance please do not hesitate to give us a call on 0800 612 7897 or email us at enquiries@drewberryltd.com.