Do you have employees your business simply couldn’t do without?  This could be the business owner or director, key salesperson or any employee with specialist skills or expertise.  If one should die unexpectedly, as well as the emotional trauma of dealing with such a devastating event you have to consider the potential impact on the business and possibly a significant portion of its income, perhaps for several months. 

With a life insurance policy on the life of a key person in place, in the event of their death the policy will pay your business a death benefit. The proceeds could be used to help pay off debt, offset lost sales, or cover the expenses that come with recruiting, hiring and training a new employee.

Key Person Insurance can also include critical illness cover which pays a cash lump sum on diagnosis of one of the specified conditions, subject to the terms and conditions of the policy.

For example:

  • A sole trader can insure their own life for the benefit of their family or the life of a key employee on a ‘life-of-another’ basis, with any claim paid directly to the sole trader.
  • With a partnership, a partner can insure their own life or a key person’s life, in both cases with the plan written in trust for the benefit of all the partners.
  • Finally, a limited company or limited liability partnership can insure a shareholder/partner or key person on a ‘life-of-another’ basis with any claim paid directly to the company.

The tax treatment of such arrangements is not always straightforward.  Broadly speaking tax relief is available on the premiums with any sums received under the policy taxed as a trading receipt.  However, the sole relationship between the employer and the life assured must be of employer and employee with the insurance intended to meet a loss of profit resulting from the loss of services of the employee.  Therefore, if the key person is a shareholder, partner, LLP member or sole trader, tax relief on premiums will not be available.

For further advice on this matter, please do not hesitate to contact me or your local Thomas Westcott office.

 

By Chartered Financial Planner, Sharon Witney