Protecting your company...
Key Man Insurance is designed to protect a business against the financial impact of losing a key person (such as a Director) due to death or a critical illness condition.
The policy would payout a cash lump-sum directly to the business, which can use the funds as they see fit, but it is often used to cover:
1. Initial start-up investment capital at risk;
2. Business loan repayments at risk;
3. Potential employee replacement costs;
Why is key person insurance important?
Research from Legal & General in 2011 found that 39% of business owners expected to be out of business within 18 months of the death or critical illness of a key person.
What does Keyman Insurance cover?
Protecting your key assets...
Keyman Life Insurance
Should a key person die or suffer a terminal illness (diagnosed with less than 12 months to live) the plan would payout a lump-sum to the business.
Keyman Critical Illness Cover
This option also enables the plan to payout if a key person were to suffer any one of around 35 to 45 critical illness conditions.
The most cost-effective method of gaining both types of cover is to take out a combined keyman life insurance with critical illness policy, which would payout once on the first event of either death or a critical illness.
How does Key man Insurance work?
Protecting your key assets...
The policy is underwritten on the key person's life however it will always be owned by the business itself.
The key person dies or suffers a critical illness condition.
Stage 2:The business makes a valid claim with the insurer.
Stage 3:The insurer pays the sum assured
directly to the business.
Stage 4:Those keyman funds can then be used
as the business wishes.
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:
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.
Life Insurance Only
A lump sum payment should the key person pass away or become terminally ill during the term of the cover.
Critical Illness Cover Only
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.
Life and Critical Illness 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.
Keyman Income Protection
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.
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 firstname.lastname@example.org.
12/05/2013 by Samkew
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03/05/2013 by pblunden
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