Find the best Key-Person Insurance policy and save money too!

Key Man Insurance or Key Person Insurance is essentially a form of life insurance for businesses. It is generally taken out by a business to compensate for financial losses that would arise from the death or extended incapacity of the key individual(s) of the business specified in the policy, and in turn ensure the continuity of the business.

There are generally three categories of loss for which Key Man Insurance can provide compensation:

• Protect losses related to the extended period when a key person is unable to work by providing temporary personnel and, if necessary, financing the recruitment and training of a replacement.
• Protect profits such as offsetting lost income from lost sales or contracts; or losses resulting from the delay or cancellation of any business project that the key person was involved in; or loss of opportunity to expand, loss of specialised skills or knowledge.
• Protect business & director loans, overdrafts or investments. The value of insurance arranged can be used cover their repayment in full, or to assist in generating continued profit (as above) to help make any monthly payments.

As a result, a Key Man or Key Person can be anyone directly associated with the business whose loss can cause financial strain to the business. For instance, they could be a Director of a company, a Partner, key sales people, key project managers and people with specific skills or knowledge which is especially valuable to the company.

If you’re a company director and you have life insurance in place to protect your family, you could be paying more tax than you need to.

Relevant Life Policies are a way of providing death-in-service benefits on an individual basis no matter how small your business is. They are not classed as a ‘benefit in kind’ so no tax is payable on the premiums. In most cases the benefits can be paid free of inheritance tax provided the benefits are payable through a discretionary trust.

What are the benefits?

• Although the company pays the premiums, they are not normally assessable to income tax on the employee as a benefit-in-kind. This can be a significant saving, particularly for a higher-rate taxpayer
• Unlike a registered group scheme, the benefit will not form part of the employee’s annual or lifetime pension allowance

What are the advantages of using a discretionary trust?

• There are restrictions as to whom the benefits of a Relevant Life Policy can be paid, but the use of the trust is the most practical way of ensuring these restrictions are met. The beneficiaries who could be included are usually family members and dependents.
• Having benefits paid through a trust ensures they cannot be taxed as part of the company’s trading income, nor do they form part of the company’s assets.
• The trust is discretionary, allowing trustees to be flexible as to whom they pay benefits. However the employee can advise the trustees of his or her intentions by completing a nomination form. Although this is not legally binding on the trustees, it helps to guide them. The trustees will normally be the directors of the company.
• Using a trust also ensures that in most circumstances benefits are paid free of both income tax and inheritance tax.
• The maximum cover differs across insurers: for example, Bright Grey offer a figure up to 15 times the employee / director’s remuneration. This can include salary, regular dividends paid in lieu of salary and any benefits in kind.

Are there any limits to the cover I have?

• The legislation does have some limits to qualify for the tax concessions, and to ensure these are met, it requires that:
• The cover must be paid in a single lump sum before the age of 75.
• Only Death & Terminal Illness benefits can be provided.
• Benefits must be paid through a discretionary trust.
• Beneficiaries are normally restricted to family members and dependents.
• The maximum amount of cover allowable can depend on your remuneration and age.

Who are relevant life policies suitable for?

• Company Directors that would like their company to pay for their life cover and offset the premiums against corporation tax
• Small businesses that do not have enough eligible employees to warrant a group life scheme.
• Directors of small limited companies that may be thinking of putting Key Person cover in place so that their company can pay the premiums on their cover
• High-earning employees or directors who have substantial pension funds and do not want their benefits to form part of their lifetime allowance.
• They are not suitable for the self-employed or equity partners, although their employed staff could be covered.