In a tragic situation, key man insurance gives the company some financial stability. The company can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner.
How do you determine who needs this insurance? Look at your business and think about who is irreplaceable in the short term. In many small businesses it is the founder who holds the company together- they may keep the books, manage the employees, handle the key customers and so on. If that person is gone, the business pretty much stops.
If the company is just you and doesn’t have any employees or other people who depend on it, then key man insurance isn’t as necessary. Don’t confuse key man insurance with personal life insurance. If you have a spouse and/or children who depend on your income, then you should have personal life insurance or income protection for that purpose.
However if the employee owns over 10% of the businesses share capital the policy then becomes shareholder protection.
Shareholder protection is an insurance policy, similar to Key Man Insurance. Should a company shareholder die or become critically ill unexpectedly, this leaves the company vulnerable to not just to a loss of profits and knowledge, but also leaves it open to competitors. If the company is unable to raise enough funds to buy the shares from the deceased’s family, direct competitors of the company may buy them. Shareholder protection provides the company with a lump sum to pay for these shares.
Because it is not a business expense the payment received, from the shareholder protection policy, cannot be taxed, as it’s a non-business receipt.
Relevant life cover is a singular death in service plan, taken out by an employer on the life of an employee, or company director. The insurance pays out directly to their family or beneficiary. All premiums are paid for buy the business.
The cost of this policy is deductible by the business as an expense and there are no tax implications on the payout.
However there are limitations:
Ask for quotes on a range of payouts and compare the costs of each. Then think of how much money your business would need to survive until it could replace the key person, come up to speed and get the business back on its feet. Buy a policy that fits into your budget and will address your short-term cash needs in case of tragedy. To get your free quotes simply click below and fill out our short form…
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