Insuring the boss’s life can mitigate disaster – Birmingham Post article 06.08.2020

Insurance could be key to protecting the key person in your business.

And with coronavirus striking down so many across the UK, business owners and top management are equally vulnerable.

Indeed, the pandemic has given a severe jolt to those firms that spend a lot of money insuring buildings, equipment and vehicles but tend to overlook their most valuable asset – people.

What if a key person or business owner either passes away, is accidentally killed, or falls critically ill, how would the business cope?

A solution is a key person policy, also known as “key man insurance,” “key woman insurance” or “business life insurance”.

It covers a business against loss of profit, replacement costs and its liabilities if the individual were to die or be diagnosed with a critical illness.

This takes in anyone whose loss would affect the business’s ability to maintain turnover or generate profits and is a direct contributor to its success.

So, for example, managing directors, owners, technical specialists and team managers.

Business Cover Expert notes: “Successful businesses are a product of their people. A business thrives or declines based on the quality of its staff. Stats show that 40 per cent of businesses would fail in less than a year if a key person or owner was unable to work. That’s why it’s well worth considering taking out key person insurance.”

Recruitment costs can be expensive and take a long time. The loss of revenue caused by the disruption may hinder the business’s ability to repay its loans and other liabilities. Key person cover helps to maintain the confidence of a business’s customers, suppliers, and lenders.

The policy is written on the key person’s life but the policy owner would be the company. It pays the premiums.

How much will it cost I hear you ask.

Legal & General cite the case of a 35-year-old non-smoker and a ten-year policy for £200,000 of life cover. It would be £8.09 a month.

But premiums vary enormously depending on what is actually included.

Factoring in critical illness cover will see them jump.

Online Money Advisor states: “While a key person insurance plan with critical illness cover provides an extra layer of protection for your firm, including it is likely to drive up the cost significantly. As a general rule of thumb, policies with critical illness included can cost up to five times more per month for the same individual compared to key person plans that are limited to life cover only.”

In addition to policies that encompass life insurance and critical illness cover, it is possible to find key person insurance packages that include the likes of term life insurance, income protection, and disability insurance.

Other factors affecting the cost of the policy include the length and level of the cover as well as personal factors related to the person you’re insuring.

Premiums can be offset against corporate tax but the benefit paid to the company on death may be taxable.

HM Revenue & Customs generally takes the view that key person insurance is tax-efficient if it is taken out “solely for the purposes of the business”. But if a key employee has a substantial number of shares, then the key person insurance could potentially be seen as being taken out for their own interests, instead of the business, especially if critical illness cover is added to the policy.

Always best then to check with a financial advisor or the local tax office before making assumptions.

Not bothering with key person insurance only works up to the point when you desperately wished you had taken it out.