Key Person Insurance
Key person insurance plays a pivotal role in safeguarding businesses from potential financial setbacks resulting from the death or prolonged incapacity of a designated member. While there isn’t a legal definition for “key person insurance,” its purpose is clear—to provide a financial safety net and facilitate business continuity.
Understanding Key Person Insurance
In essence, this insurance involves a policy taken out by small or medium-sized businesses, focusing on individuals whose roles significantly impact the company’s success. The policy duration aligns with the key person’s relevance to the business, ensuring coverage during their vital contribution period.
Unlike insurance policies that indemnify actual losses, key person insurance offers a fixed monetary sum, specified in the policy, in the event of the insured person’s death or critical illness, as defined in the policy terms and conditions. This financial injection aims to mitigate the impact on profits and support the seamless continuation of business operations.
Identifying the Key Person
A key person can be any individual directly associated with the business whose absence could lead to financial strain. This may include directors, partners, influential salespersons, project managers, or individuals with specialized skills or knowledge critical to the company’s functions.
Taxation Aspects
Understanding the taxation aspects of key person insurance is crucial for businesses. The premiums paid are typically considered a business expense for corporation tax purposes, provided certain conditions are met:
- Employer-Employee Relationship: The relationship between the proposer and the life assured should be that of employer and employee, with exceptions for shareholding directors.
- Loss of Profits Coverage: The policy should be designed to cover the loss of profits only.
- Policy Duration: The policy’s term should not extend beyond the period of the key person’s usefulness to the business.
- Shareholding: The employee should not hold a significant shareholding, usually less than 5%.
While premiums are often an allowable expense, the tax treatment of proceeds varies, and each case should be reviewed by local tax authorities for guidance. Policy proceeds typically escape tax unless paid in instalments.
Important Considerations
- These plans have no cash value during the term and will lapse if premiums are not maintained.
- Taxation details are subject to change based on legislation and individual circumstances.
Understanding the taxation implications is essential when determining the sum assured for key person insurance cases. For precise guidance, consult with your local tax authorities before implementing the policy.
