Business Protection options

A key-person is an individual who is vital to the success of a business. The loss of a key person’s specialist expertise or skills could severely impact the business. It could be the company owner, director, salesperson or any employee who would be difficult and costly to replace.

Key Person cover is often referred to as Key Man Insurance.

Key Person Cover is life insurance with the option to include critical illness cover and protects a business against loss of profit on the death of a key person, or to pay a debt or loan where repayments would be affected by the loss of a key person.

This should be based on the level of profit that is expected to be lost if this person died or suffered a critical illness.

Our advisers are able to help you calculate the level of cover you need.

This depends on the trading style of the firm setting up the policy.

For limited companies and limited liability partnerships, the firm would typically be the applicant and would own the policy and pay the premiums.

For partnerships, one of the partners would typically own the policy with any proceeds paid via a trust to all the partners.

A sole trader can take out Key Person Cover on the life of a key employee. A sole trader can also take out Key Person Cover on their own life, with benefits paid under a trust to their next of kin. This will help pay trading debts or assist trading activities in the event of death or critical illness.

Unfortunately, the tax treatment of Key Person Cover premiums and proceeds is not straight forward. In some cases, the premiums will be treated as an allowable expense and any subsequent proceeds are likely to be treated as a trading receipt. If however the premiums are not treated as an allowable expense it does not automatically follow that any proceeds will not be considered a trading receipt.

With many providers, you can choose any amount up to 80% of annual earnings. Earnings mean the combined value of gross income paid through PAYE and the taxable value of selected non-cash benefits received as benefits in kind in the 12 months before the employee became incapacitated. Shareholding directors can take account of the dividends they receive from the company.

You can choose the age at which cover for your employee will stop – often this is known as the plan expiry date. This can be any age up to their 70th birthday. The minimum plan term is typically 5 years.

Benefit payments start after your employee has been unable to work for an agreed period of time because of sickness or injury.

The deferred period options are typically 4, 8, 13, 26 or 52 weeks.

When setting up the plan you can choose how long you wish the benefits to be paid for, this is normally to a policy expiry date you have selected (such as an expected retirement age) or for a limited payment period of 2, 3 or 5 years. Benefit payments will stop earlier if the employee reaches the plan expiry date during the payment period.

Share Protection is for limited companies and Partnership Protection is designed for partnerships and limited liability partnerships.

Potentially, a normal shareholder protection scheme can function as long as two shareholding directors are involved. However, it is designed to be a reciprocal arrangement with all shareholders (or partners) taking part.

The amount of cover is set at the beginning of the cover and the company value at claim stage would not normally affect this amount. For this reason, our advisers will regularly review the level of cover in place and encourage business owners to take action if required.

Premium equalisation ensures that all participants in a Share or Partnership Protection arrangement pay a commercial amount relative to the benefit they or their family is likely to receive. Premium equalisation is a required part of any Share or Partnership Protection arrangement.

Yes, cover is available for all employees, as long as the business pays them a salary.

No, Relevant Life Cover is only available for employers to insure and cover their employees.

No.

There are a number of different options available, the most common is that many providers can give the old employee a new own life insurance policy on the same terms as the existing contract, without the need for further underwriting.

Most policies will pay the full amount of cover if the employee is diagnosed with a terminal illness and given less than 12 months to live. Most providers won’t pay a claim for terminal illness if the policyholder is diagnosed with a terminal illness within 12 months of the end date of the policy.

All Relevant Life policies are written in trust and money is paid to the trustees. Therefore, the trustees would need to contact the provider.

Many providers will offer additional benefits to companies as part of their business protection policies. Some of the benefits include:

• Legal advice service – which gives you access to legal experts specialising in business and commercial law
• Business tax advice – access to business tax and VAT experts. Offering advice on Tax and VAT relief, completing a self-assessment return, dividends paid from limited companies as well as other tax advice.
• Personal advice service – including legal, medical and counselling support line