Simply put, Key Man insurance (or key person cover) provides your company with a cash lumpsum in the event of the death or serious illness of a senior employee, a director or the business founder. Provided a company takes out key person insurance on an employee solely for the purpose of protecting the business from loss of profits that could result from the loss of that key employee due to death or critical illness, the company may be allowed tax relief on the premiums.
Key Man Insurance can help by providing your business with compensation when a key member of staff cannot work through death or illness. It will allow you to:
- Ensure continuity of business
- Hire or train replacement personnel to maintain key business competencies
- Sort issues relating to share ownership
- Offset lost income
- Protect guarantee business loans or banking facilities
- Keep up with debt repayments
- Sort out staff loan repayments
- Preserve the value of your business
Benefits Of Key Person Cover
The primary benefit of key person coverage is that it can bring peace of mind. If anything happens to you, or your company’s key employees, due to the financial cushion provided by appropriate key man insurance, the effect on the business will be significantly reduced.
If you take out a loan from a business, the bank may require you to take out the key man cover to protect the loan. This gives the lender reassurance that the loan will be repaid should the person, or people, suddenly cease to be around most crucial to the company’s success.
Fall In Profits Are Protected
If the business is highly reliant on a key man for generating profits, then Key Man Insurance for income purposes may be appropriate. This can be used to protect the business against any loss in profits or increased costs that crop up as a result of losing the key man.
Covering Of Enrolment Costs
Key Man Insurance also may cover training a substitute to handle the essential tasks the key man was responsible for, finding new employees can be a time-consuming and costly exercise to do. No business wants to be spending in excess to replace their staff as this could have a negative impact on their bottom line.
Ease Of Some Stress
Losing a Key Man can be an upsetting time, mainly when illness and death is the main reason. The pressure that this type of absenteeism can put on your employees and your business can be colossal, as employees attempt to pick up extra load. By making sure you have key man insurance for your company means that in a worst-case scenario your employees will be in a better position to manage.
When Should You Consider Key Man Insurance?
Key Man insurance benefits the whole firm as it provides continuity. There are plenty of times to consider Key Man insurance. It is important when starting out as your firm may be reliant on a key group of talented individuals to help it grow, or more established firms may need employees with a skillset. Employees are the greatest asset a business has, losing an important person in a firm may not just hit profits but could also cause uncertainty and make others want to leave. Small businesses may have an influential founder whose departure could result in a loss of ideas and leadership, while companies of all sizes may have a salesperson responsible for most profits or someone with additional technical skills that can easily be replaced
Without Key Man Insurance
A Key Man’s loss from your business can result in reduced sales, loss of profit, and reduced turnover, which can also lead to wasted time, recruitment costs, development and plans disruption, loss of strategy, and increased workloads for the remaining staff. Your business might not be able to recover without a backup plan in place, which is why key man insurance is so important.
Who Needs Key Man Insurance?
Any business, no matter the size, may have a need for Key Man Insurance if the financial success of the business significantly depends upon one or two people. Small businesses should not overlook this coverage. Smaller businesses are usually more dependent on one or two key people for success.
Do I Have To Pay Income Tax If A Policy Pays Out?
When Key Man Insurance is taken out to cover an employee, premiums are typically an eligible
corporate tax-deductible business expense. That’s because the payout is not for the employee’s benefit but for the business to compensate for that key person’s loss.
What Is Essential?
The business must always have an “insurable interest” in an employee in order to benefit if
something happens to them, inevitably most policies are pursued on business managers and management, but these are not the only people that are vital to a business’s success and survival.
Your Business could have several employees that are vital to the company’s profitability.
The plan will have to cease at this time as there would no longer be an insurable interest.
For more information on whether or not you need a Key Man Policy, contact a member of our team at WIS Business Protection.