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If your business lost a key person could it cope?

Businesses must review key person insurance in difficult times

Thursday 19 March, 2020

Vishal Gulrajani Financial Planner in North London, Cheshunt and Goff’s Oak reviews the importance of key person insurance to local Hertfordshire and North London small and medium sized businesses.

A couple of weeks ago I discussed the importance of business protection and particularly relevant life policies and explained the tax efficiency this brings for the self-employed and company owners. 

What is key person insurance and why is it important?

Today I will focus on key person insurance and the significance of making sure a business is protected in a worst-case scenario. 54% of businesses are not sure they would be in business in 12 months’ time if one of their directors were not able to work. A key person which can be a director or employee is crucial to the success of the business due to their skill, knowledge or experience. 

Every business will have certain key people who are vital to its success and prosperity - but what happens if this key person or key people were unexpectedly absent? 

Most businesses would suffer if its key staff were unable to work and the absence of such individuals would cause a detrimental impact on business performance and therefore its present and future profits. The consequence of losing a key person can significantly escalate down the whole business. This can start with a loss of confidence in the business for customers or suppliers, leading to an interruption or loss of sales, meaning reduced profits. Later this can result in increased cost and time to find the right individual to replace the key person in the business.    

How to protect your business with key person insurance?

The good news is that you can protect your business through key person insurance. This means if this key person or people become critically ill or die, the business will have funds available to keep their business trading, replace key individuals, provide employee benefits, protect corporate debt, buyout a shareholder or their estate and make sure their dependents receive a fair value for their share of the business. Obviously only some of the above situations will apply depending if the key person protected is a shareholder or not, but the key is that money will be paid to the business and the employer takes out the insurance to safeguard his business. As a result, the business will survive and sustain itself in times of need and the loss of one individual doesn’t cause the whole business to close which would affect other employees, customers or suppliers.

What are the tax benefits of key person insurance? 

Vishal Gulrajani Financial Adviser in North London, Cheshunt, Hertford & Hertfordshire said:

‘The Anderson principle means that the proceeds of the key person insurance policy can be eligible for corporation tax relief, but this is usually when the proceeds are used to meet a trading loss and the individual covered has under a 5% shareholding. Also, the term of the policy should not extend beyond a key person’s usefulness to the employer. Generally, if the premiums are eligible for tax relief then the proceeds will be taxable and vice-versa. Our Thomas Oliver financial advisers are used to working with other professional intermediaries including solicitors and accountants to support businesses with their financial planning. We often work alongside trusted tax advisors who can give you greater clarification about key person insurance and why it’s suitable for your business. They ensure that if you take out a key person policy it is set up tax efficiently.’

Vishal Gulrajani Financial Planner in North London, Cheshunt & Goff’s Oak continued:

‘Overall the concept of key person insurance is a necessity for most businesses and is one of the most important mechanisms used to help protect your business. At Thomas Oliver when we offer businesses financial advice in relation to protection needs, we review all your business requirements to ensure that the protection solutions we recommend are unique and tailor made to your business needs. As a result, we work with highly qualified and trusted professionals to achieve the right outcome in a tax efficient manner. If your business requires protection advice and you are considering key person insurance, please contact our qualified financial advisers on 01707 872000. We can set up an initial consultation to discuss your business requirements and put in place key person insurance if necessary.’

In Summary…

In these difficult times you should protect your business and your key people. Call our financial planning team on 01707 872000 and take out key person insurance for your business today.

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