Key man insurance, FAQ
In April 2010 the British Chamber Of Commerce commissioned research into the Business Protection Gap for Key Man Insurance and Ownership Protection, which produced startling results. The reported gap is approximately £400 billion.
Surely this is an additional expense my business could do without?
In times of austerity we all have to look carefully at what we spend, both as individuals and businesses. However, most of us insure our cars, our houses and it's contents, our pets, our mobile phones etc. It must make sense to insure the entity that makes it possible to have all the secondary items, as surely one may argue that losing a business would be a far bigger financial cost.
What exactly is a keyman?
A key man is any valuable member of your company who, should they pass away or suffer from a critical illness, will result in financial losses for the company. The most common types of a keyman are: Company directors, shareholders, CEO’s, chairman, partners. Also a sales manager or top salesperson could be a significant loss to a company.
In a manufacturing environment the loss of someone with expert technical knowledge would impact negatively on an important project. The ability to hire an immediate replacement could mean the company carries on trading, or suffer damage to reputation and profit.
How do I know what level of cover I need?
There are many expenses that could be incurred, whether recruitment or lost of turnover and income. We have a selection of experienced advisers who can assist in helping you calculate the level of cover that is right for you.
What type of policy is Ownership Protection?
Ownership Protection is there for shareholders – or partners – in the firm, but of course the premium needed to cover the different owners will vary due to age and shareholding.
How much cover is needed will vary dependent on the value of a Partner's or Director's shareholding which can fluctuate over time. Therefore, it's wise to evaluate the amount of cover needed on at least a yearly basis.
The partners and directors pay the premiums. The company can pay on their behalf but this will usually be classed as a benefit in kind and the director / partner will then have a personal tax obligation.
The premiums will normally depend on a few factors:
- The age of the Directors with share holdings
- Possibly their medical conditions if the sum insured is large, and
- The percentage of shares the Partner/Director owns
As the directors will normally always be of different ages and have different shareholdings a premium calculation equation can be used. This means that each director's premium will vary. The premiums in most cases don't attract tax-relief and if the policy pays out this is usually tax-free.
How would the policy be set up?
If the business is adopting either a cross option or buy and sell arrangement (these are types of legal agreements allowing the swaping of shares for cash – you adviser can explain in more detail) for the purchase of a business interest, each shareholding director or partner would take out a policy on their own life. Each policy should be written under a suitable trust (often called a business trust) for the benefit of their co-directors/co-partners. If partners are using the automatic accrual method, each partner would be expected to take out and maintain a term assurance policy, written under trust for the benefit of their family (as recompense for not inheriting the business assets).
What is Business Loan protection insurance?
As its name suggests it's a form of insurance designed to repay all or part of a company's debts should a key employee die or suffer a critical illness.
It is a more restrictive policy than another form of keyman insurance called profit protection as the money can only be used to repay debt, including an overdraft facility rather than for general use such as shore up profits or retrain and recruit staff etc.
There are many variables to consider, which is where we can help. We can put you in touch with an expert in the field of business and keyman insurance, who can then explain the various options available to you, allowing you to ensure that anything you may decide to do is right for your circumstances. All our independent advisers source the whole of the market to secure the correct deal for you.
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