A player hits the floor and they’re not faking. Is your business ready for the consequences? Jono Wilson of Barnett & Turner explores the world of key person insurance. With the new football season under way, we’re bound to be treated to some spectacular dives from players claiming injury. Amazingly, most will manage to dust themselves down and be back in action within a few minutes after their temporary histrionics.
But sometimes the player isn’t faking. Career-changing injuries really do happen. Players can find themselves out of action for six months or a whole season.
The same is true in any business, of course. That’s why it’s worth thinking about whether you’re prepared for a situation in which one of your key members of staff is seriously injured or signed off sick with a long-term illness.
Key person insurance is designed to compensate your business for financial loss if an important employee dies or becomes critically ill. Of course, at a moral and ethical level, all your staff are equally important, but some may be fee-earners, providers of loan finance or have some specialist knowledge that the company needs in order to survive.
Imagine if a partner died or became too ill to work, for instance. The insurance policy might provide the money to buy out his or her share of the business, allowing the other partners to retain control. In the event of the partner’s death, the full value of his or her share would be paid to their beneficiaries.
Thinking about the next level down within the business, a policy for an identified key individual will pay out the estimated financial loss to your company. Here are a couple of the common pay-out options available in this particular insurance market:
Multiple of salary – a straightforward calculation, but does it reflect the true value of the individual to your business?
Proportion of profits – taking into account annual salary, annual profit and the amount of time it would take to replace a key individual.
It’s also worth thinking about personal guarantors of a business loan. In the event of their death – or a serious illness – the lenders might be in a position to call in a loan, so insurance can be a useful way of providing peace of mind to both you and the guarantor’s family. You may also want to consider insuring against the loss of a key shareholder, although this is a particularly technical area, so it’s important to consult your accountant or financial adviser.
Terms of the policy can vary, but are normally based on five years’ cover. There isn’t any specific legislation that covers this type of insurance, but it’s worth bearing in mind that if the premiums qualify for tax relief, any benefits will be treated as a trading receipt. If the key person has a shareholding of 5% or more, tax relief is unlikely to be granted on the premium, as the policy is partly for the assured person’s own benefit.
The best advice is always to talk to your accountant before committing to any particular type of insurance cover.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at email@example.com