Insurance cover for an individual that is key to the business
Essentially, that’s what key man cover is, let’s see how it works.
Key man cover, if you don’t know already, is life insurance but placed inside a business. The business meets the monthly insurance premiums instead of the individual. The insured amount protects the life of the key person, usually the owner or a director. Key man is defined as someone the business couldn’t run without. This could be your sales director, director, head of accounts. It varies business to business depending on size and structure.
Let’s look at key man cover in more detail. A company gets a life insurance policy on their key man, pays the insurance premiums and is the beneficiary of the policy. If the key person dies, the company gets the insurance payout. This can be vital to companies, especially small ones. The death of a key person can severely effect the company itself and often means the end of the company. If you lost your sole director in a four man business, who would take over? Often the lump sum paid out is used to pay off employees and settle any debts of the company. Meaning a happy ending for all.
How to judge the correct amount of cover
This depends on your business and circumstances. Generally, it’s best to get as much key man cover as you can possibly afford. In insurance, you’d rather be over covered than under covered. With more cover than you need you can cover all of the outcomes in case of a tragedy. Not being covered in the event of a death can be disastrous. Especially when it could put the livelihood of employees at risk, you want to make sure you have enough key man cover to take care of all shortcomings.
An easier way to look at the lump sum being covered is to look at how much the business would lose if the key person ceased to work. How much would the turnover and profit go down? How much would it cost to get in a replacement? Are they even replaceable? How long would the business survive without them and at what level? These are all variable factors business to business. The best way to look at it is to analyse accounts and each business individually. We will help advise on this process and come to a figure after discussions. The company can use the proceeds from the payout to find a new person to act as that key person. Or it can pay off debts, distribute that money to investors, pay severance packages to employees and close the business if needs be. As you can see, it gives the company options as opposed to just declaring bankruptcy.
Key man cover, is it tax deductible?
One of the most commonly asked questions is, is key man cover tax deductible? The written law on this is more than 70 years old having been outlined in 1944 by Sir John Anderson. He said that all cases would be different. But the sole relationship between the business and the insured person must be that of an employer and employee. Shareholders can have cover arranged for them. Claiming the premium can only be classed as an expense if they don’t have ‘significant‘ holding. This is typically less than 5% but may be open to interpretation. Tax treatment of the key man cover policy payout can also be down to interpretation. For example, if you get tax relief on the premiums then the payout will be taxed as it will be used to boost your businesses profits, pushing up your corporation tax liability. If the business didn’t get relief on the premiums, then it’s likely the payout will be treated as capital rather than profit so will not be taxable. Everything is down to HMRC’s views. It’s best to consult them or an accountant on how to structure this. Whether the amounts are tax deductible or not another way to look at this is you won’t be paying the premiums yourself. The business will pay them before they enter your own pocket if you are a director. Paying premiums out of your own back pocket can be avoided by this being paid by the business.
Who exactly would I look to cover in the business? How do I determine a key man?
This really varies on your business. To most small businesses this would be clear, the director of the company. But with a larger business and more key staff, who exactly could be this be? I’d start by looking around your business and assess who is irreplaceable in the short term. For a lot of small businesses this is the owner who holds the company together, he keeps the books, manages the employees, talks to key clients and has a wealth of knowledge on the running and application of the business. Without him in place the operation would simply not run.
If that person were to go, the business would be decimated in the short term. As a result, the business would often not recover from this and would have to fold. It’s this risk that you would need to cover with the correct amount of insurance.
Getting key man cover using whole of market advice
Our access to the whole of market of insurers helps you get access to all the insurance deals on the market. Insurers offer this insurance to businesses and we are best placed to scour the deals on your behalf. We do this FREE of charge. We will endeavor to find you the best package to suit your circumstances. Whether it be family income benefit, buildings and contents or income protection all our insurance advice is FREE.
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