The Risk of Losing the People that Matter
The COVID-19 pandemic has shown the impact when businesses lose key people for any length of time. Regardless of the nature of your business or what sector it’s in, there are usually certain people who have a major effect on the success of your business.
The question to ask yourself is, if one person in your business is responsible for 60% of your profits, how would you manage without them? One possible answer is to protect your business with key person cover.
What is Key Person Cover?
Key person cover is a business protection insurance that covers the risk of your reliance on a key person for your profits. It protects you against your lost profits if that key person becomes critically ill or dies.
Who Can You Insure With Key Person Cover?
Anyone who has a major impact on the financial success of your business can be insured with key person cover.
They could be central to your business because of their specialist skills, knowledge or experience. Shareholders can be key people, but non-shareholders can also have a dramatic effect on business performance and profits. Think about which of your employees or shareholders makes the most difference to the financial success of your business.
How Much Key Person Cover Do You Need?
There are different ways to work out the level of key person cover. These include a multiple of profits, a multiple of salary and a proportion of payroll. The insurance premiums are paid by your business.
If you speak with a financial advisor, they’ll be able to talk you through what cover is suitable for your business and how it’s calculated.
What Are the Tax Implications of Key Person Cover?
The tax position depends on the specific case and the practice of the local inspector of taxes. It’s always best to seek written guidance from your local inspector of taxes.
Generally, the payouts will be taxable and the premiums tax-deductible if the person insured is an employee, the insurance is to cover the loss of profits when a key person can no longer provide their services and it’s annual or short-term insurance.
Key Person Cover vs Relevant Life Cover: What Are the Differences?
Business protection insurance comes in many forms, so check which is most suitable for your business and its situation.
Relevant life cover pays out a lump sum to the insured’s family or beneficiaries. The insurance is to help them pay living costs and bills.
Whereas key person cover pays out a lump sum to the business because the insurance is to protect the business from the financial impact of losing a critical director or employee.
If you would like to speak to us about advice on business protection please email [email protected].