Over the last few weeks we have been looking at the different types of protection a business could consider.
What is this blog series?
Our ‘Protecting You and Your Business’ blog is a mini series for business owners who are concerned about “what happens to me and my business if…..”?
Episode Four, the final episode, is about key person insurance.
Our Financial Planning team will discuss your particular circumstances. Our aim is to develop a strategy so that the right pieces are in place to future proof your business.
Episode Four: Key person insurance
“Men and women, not machines, are the real source of profits in any business” Andrew Carnegie
Your business is more than its website, its premises, equipment or bank balance.
In most cases it is the ideas, the contacts and commitment of the owners and key employees that is the vital element in driving it forward.
Yet, in most businesses it is the premises and the equipment that we insure; buildings against floods or fire for example; equipment from breaking down or theft; vehicles from damage.
New computers and vehicles can be replaced fairly easily and quickly, buildings can be refurbished.
What happens if it’s your Key Sales Manager who can’t work or is no longer there. Could they be replaced as easily? Would client relationships and then profits suffer?
It is important to think about how your business would cope if you were to lose a crucial individual – particularly as a result of ill health or death – and the impact such a loss would have on the success, future and the viability of your business.
Key person Insurance
In a simple terms…
What is it?
It is a type of Insurance policy for businesses.
The pay-out provides funds to help find replacement staff, and cover lost profit streams, and a critical illness cover option is also available.
Who is covered?
Any key member of staff who impacts on the profitability of the business. It could be a chief executive, IT specialist, salesman, director or owner.
It provides funds to help find staff replacements or replace lost profits, hopefully until the business recovers.
- It may be possible to offset the cost of Key person protection against your Corporation tax bill.
- A claim pay-out is likely to be treated as a trading receipt and therefore potentially subject to corporation tax
Tax considerations key criterion. The policy must:
- Be “short term” – how long will the employee be of benefit to the business?
- Cover an expected loss of profits
- Be for an employee (it is possible to insure owners or take cover for those who own a stake in the business but this can change the tax situation.
Considerations for cover
What does your business most rely on – every business will be different, it could be:-
- A shop premises
- Forward order book
- The website
Who does your business most rely on?
Again every business will be different, it could be:-
- The Sales Manager
- The Maintenance Manager
- The Computer Systems specialist
- You, the owner
Identify your key people and then the amount your business would need.
Key person cover calculations use two broad methods:
- A calculation of the cost to replace an individual based on their earnings, typically by taking a multiple of annual earnings
- Calculation for replacing the profits the key person is responsible for, typically insuring a multiple of the gross annual profit they generate.
Compiled by Deborah Trelease, Financial Planner at Tait Walker Wealth Management (TWWM).
“Myself and my experienced colleagues within the TWWM Financial Planning team will discuss your particular circumstances; our aim is to develop a strategy so that the right pieces are in place. Contact us to talk through your individual circumstances.”
At Tait Walker Wealth Management we have a team of Financial Planners whose aim is to help businesses and individuals ensure they have the right protection for them, their families and their business.
Tel: 0191 285 0321
The purpose of this blog is to provide technical and generic information and should not be interpreted as a personal recommendation or advice.