Key Person Assurance
Who is a key person?
A key-person is one whose absence (due to illness, disability, or death) would cause significant financial hardship for a business.
Examples could include the business owner/s, a top executive, a key salesperson, or anyone with specialised skills or knowledge crucial to the business's operations and profitability.
Imagine a 'family tree' flow chart diagram of how your business is organised.
Key Person Assurance Case Study
For a limited company, the family tree diagram will show the managing director at the top, and the senior managers or directors in the next line down. Further down the chart will be the middle managers and the staff.
How would the business cope if one of those individuals were no longer there? What would happen to the cash flow of the business?
Would the gap left be big enough to cause the collapse of the whole business?
Their loss could lead to decreased revenue, increased expenses (like recruitment and training costs for a replacement), or even damage to the business's reputation and ability to secure future funding.
Retaining key people: protecting profits
Many firms acknowledge the problems they may face if a key individual leaves employment.
Advertising for key positions will often describe the excellent salary the successful applicant will earn. It also describes the company car, subsidised mortgage, health care and pension scheme.
These packages are designed not only to attract the best-qualified staff but also to ensure those people remain in the position.
If one of these executives received a better offer from a competitor, it is likely they would be offered a financial incentive to stay.
The business is effectively insuring itself from a key individual leaving of their own free will.
Key people: protecting profits in the event of death (and/or critical illness)
Key-persons assurance provides a cash injection from a life assurance product. The capital can be used to replace lost revenue, pay off outstanding loans, or even cover the cost of recruiting a replacement.
Most importantly, it gives the company breathing space to reevaluate it's strategy and refocus its remaining resources.
What is the tax position?
If term assurance is selected then premiums will usually be eligible for corporation tax relief. This is subject to the plan:
Any payment to the company of the sum assured would be taxed as a trading receipt at the usual rate of corporation tax.
It is therefore important to gross up the sum assured at outset to compensate for the tax on the claim.
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If you would like to discuss your needs and how we can help you, do reach out. We can offer you a confidential discussion with no obligation, in person or via video call.