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What is Key Person Insurance?
Key Person Insurance protects a business financially in the event an important member of staff (Key Employee) passes away or is sick.
The business owns and pays for the policy and is crucially the beneficiary of any payments, not the employee themselves! The money can be used to help the business through a difficult time which otherwise may have resulted in it ceasing to trade.
- Benefits are paid tax free to the company
- Policies can be cancelled at any time without penalty
Types of Key Person Insurance
There are three main types of cover to choose from:
- Key Person Life Insurance - The business will receive a cash lump sum should an important member of staff pass away.
- Key Person Critical Illness - Pays out a cash lump sum to the business on diagnosis of a critical illness.
- Executive Income Protection - Pays a monthly income to the business whilst an employee is unable to work due to accident/illness. This can be used to cover their salaries or loss of profits.
Key Person Insurance protects a company from loss of profit on the loss of a key employee, or to pay a debt or loan where its repayment would be compromised due to this loss.
Unfortunately the tax treatment of Key Person Cover premiums and proceeds is not straight forward. In most cases, the premiums will be treated as an allowable expense and any subsequent proceeds are likely to be treated as a trading receipt.
However we recommend speaking to your accountant regarding the tax implications of any plan.
Who benefits! - Whilst both types of insurance are paid for by the company, a Key Man policy will pay out to the business, whilst a Relevant Life plan is for the benefit of the employee and their family!
These plans can only remain in place whilst there is an insurable interest; this means the policy cannot carry on if the employee leaves the business or is beyond retirement.
Plans are usually short-term and between 5-20 years
The plan will have to cease at this time as there would no longer be an insurable interest.
Yes - A sole trader can take Key Person insurance on an employee, or on their own life with benefits paid under trust to their next of kin. This will help pay trading debts or assist trading activities in the event of death or critical illness.
Sole Traders
Limited Companies
Limited Liability Partnerships
In most cases insuring for 2x the employee's contribution to gross profits is recommended although with more in depth analysis a more accurate figure can be obtained.
This will depend on the type of business applying for the cover:
A limited company or limited liability partnership would be the applicant, own the plan and pay the premiums.
For Partnerships normally one of the partners owns the plan with proceeds paid via trust to all the partners.
Yes you can cancel the plan at any time with no penalty.