Business Protection Insurance
Key man cover
Sometimes also referred to as key person cover, is designed to provide a monetary protection to your business against the death or long term absence of an employee or director who is key to the business.
You should consider key man cover, if your business relies on an individual or certain individuals and their absence or loss are fundamental to the business.
How does it work?
Key man insurance is a type of life insurance policy that is taken out by a business on the life of a key employee. It is also possible for the policy to pay out in the event of the key person being diagnosed with a specified critical illness.
If the key person dies or suffers from a critical illness the policy pays out a lump sum to the business and the business.
Relevant Life Cover
Company directors paying 40% personal income tax could save up to 52% on their own life insurance premiums (up to a 36% saving for those on a 20% tax rate) when compared to having personal life cover in place.
This pays out a cash sum if a Partner or Director (with a shareholding) dies or suffers from a critical illness. The money can be used by the remaining Partners/Directors to buy the shares.
One of the main areas to think about for partnerships and company directors with shareholdings should they pass away is;
• Who will their shares be left to
• What will this new shareholder do
Note that this type of insurance can go under many names including –
• Director protection insurance
• Partnership protection, and
• Shareholder protection
Let’s now talk a bit about tax…
When it comes to taxation, the defining factor as to what and whether key person insurance is deductible is who the beneficiary is going to be. To even be considered for tax relief, the policy needs to be owned by the company and the premiums paid by the company itself. Any policy that is given as part of an employment package and ends up becoming the property of the insured party is not strictly company profit and therefore cannot be tax deductible.
However, in cases where the company is going to benefit directly from the policy, there are two common scenarios to consider:
If the company is to be the only beneficiary
In the case where the company is ‘wholly and exclusively’ the beneficiary of the insurance, then the premiums may be tax deductible. This could apply, for instance, in the case where the insurance has been taken out to cover the hole in the company income that the person would leave. However, in this case the insurance pay-out will be considered a part of the company profits, and therefore would be taxed accordingly.
If the company and an individual are to be beneficiaries
If you are insuring a shareholder so that the company is in the position to pay a fair, market price for those shares if the person dies, then it is not only the company who will benefit from the insurance pay-out. Although the company will certainly benefit by being able to buy the shares, the shareholders’ estate and subsequent beneficiaries will also be benefiting. In this case, the premiums paid cannot be claimed as a business expense, but on the other hand, the pay out of the policy is not a taxable receipt in the hands of the company.
These are two examples of how the taxation can work. But every case is in itself unique and although the HMRC largely agree with the base principles here, they would also I think state, that every situation should be looked at on an individual case by case basis.
Relevant life insurance is fundamentally the same as the common types of life cover you might be more familiar with such as; level-term and decreasing-term life cover. However, the difference with a relevant life insurance policy is that it is paid for by your business, meaning it is eligible for tax savings. Relevant life insurance premiums are tax deductible as a trading expense. Because they are not treated as a P11D benefit there aren’t implications on the amount of personal tax you pay.