Business Protection

A key person in a company is someone whose skills, expertise, and contributions are pivotal to the profitability and operations of the business. This could range from owners and directors to employees who possess unique skills. Key Person cover is essentially a life insurance policy a business takes out on such an individual, aiming to mitigate financial losses that could occur from their sudden death or critical illness.

Contemplating the loss of a vital team member is unpleasant but necessary for business continuity planning. The absence of a key person could lead to decreased sales, profit losses, and increased pressure on remaining staff.

Key Person Protection offers a financial cushion, providing a lump sum in the event of death or critical illness of a vital team member. This financial relief can be instrumental in helping the business stabilise during a challenging transition period.

Key person risks include scenarios like the sudden death of a CEO, a top salesperson being incapacitated due to an accident, or an executive taking extended leave for medical treatment, all of which can disrupt business operations significantly.

The cover amount can be based on a multiple of the key person’s contribution to gross or net profits, or a percentage of gross profit proportionate to their salary, considering the potential recovery period.

Though set up by the company, a relevant life plan is not a business asset it is held in trust by trustees for the benefit of designated beneficiaries, ensuring direct payout to them.

Relevant Life policies can receive favourable tax treatment where the qualifying conditions are met. The treatment of premiums and benefits depends on the policy structure and circumstances, so appropriate tax advice should be obtained.

Premiums for a relevant life policy are paid by the employer during the employee’s tenure, with the policy being established in trust from the beginning.

Relevant Life Cover can be a tax-efficient way for a company to provide life insurance for a director or employee.

The employer normally pays the premiums, which are not usually treated as a benefit in kind and generally do not attract employer or employee National Insurance. The premiums may also qualify as an allowable business expense for Corporation Tax purposes, subject to HMRC rules.

The policy is usually written into trust, which can help keep the payout outside the employee’s estate for Inheritance Tax purposes, and it does not normally affect pension annual allowance limits.

The structure of relevant life plans allows for tax-efficient benefits without counting towards an employee’s lifetime pension allowance, with premiums not considered a taxable benefit in kind and often deductible as a business expense.

Shareholder protection safeguards the business during the unsettling period following the loss of a key shareholder, ensuring operational stability and fair compensation for the shareholder’s beneficiaries.

The tax treatment of Executive Income Protection depends on how the policy is structured, who receives the benefit and the circumstances of the business and employee. Obtain tax advice rather than assuming premiums or benefits receive a particular treatment.

Executive Income Protection is highly beneficial as it can cover a substantial portion of an executive’s income, including salary, dividends, and benefits, ensuring financial stability in the event of illness or injury affecting their ability to work.