Business Insurances – Keyman (or Key Person) Assurances

I am oftern asked to comment on this area of business planning and thought it worthwhile to provide an overview here.

Keyman Insurance is designed to compensate a business for the financial loss on the death or critical illness of a key employee. On death or critical illness a lump sum is payable to the business to use to mitigate the loss of the key person. A key person may be someone who brings money into the business, it may be someone who has specialist skills and knowledge or it may be someone on whom the business depends for loan finance. Examples of a key person could be: Sales Managers, Company Directors or research specialists.

How much should I insure a key person for?
The following are issues that should be considered:

• The effect on profits if the key person were to die or become disabled.
• The cost of recruiting and training a replacement.
• Loans that could be recalled on the key person’s death or disability.

Insurers often seek to justify the sum insured on the basis of:

Multiple of salary – The key person’s salary is multiplied by a factor, normally between five and ten times. The advantage of this is that it is straightforward to work out. However, it may not give a true reflection of an individuals value to the business.

Proportion of profits – This method takes into account the key person’s salary, annual profit and the amount of time it would take to replace them and may give a more scientific answer.

Term – Cover can be effected by way of a term assurance policy and is usually taken for a term of 5 years although each case depends on individual circumstances.

Tax position – Although there is no direct legislation concerning the taxation of keyman insurance the following is generally considered to be true:

• Should the premiums qualify for tax relief then it is likely that the benefits will be treated as a trading receipt.
• If the key person has a shareholding of 5% or greater then tax relief is unlikely to be granted on the premium as the policy is partly for the assured’s own benefit. We would recommend that your local inspector of taxes is consulted prior to the inception of a policy to understand your individual tax position.

I hope that this helps, please contact me for for further information or a discussion.

Richard Smith

The Finance Zone

0845 226 9106

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Electricity – Gas – Mobile Phone – confused I am!

Is it me, or have you noticed that will all UTILITY type products there are several methods of pricing.

There is confusion 1 – make the pricing complicated enough and people will not not know if yours is cheaper or not.

There is confusion 2 – make the product features so complex that it is impossible to compare like with like.

There is confusion 3 – make your existing customers so confused about the bands, tarrifs and options  they will not bother to consider.

I always thought Insurance Companies were the worst at this, and now I know.

Richard Smith

The FINANCE ZONE

0845 226 9106

Posted in News - Updates | Comments Off