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Businesses deal with risks every day, but often overlook one of the most serious risks that could affect their future performance or even existence itself. This is the risk of long term illness or death of a key person.
Key person cover protects a business against the loss of one of its key employees through death or serious illness. A key person is someone whose long term absence or death would affect the overall profits of the business such as an owner, a director, sales people, or any employee with specialist skills or knowledge.
The key person is the person covered and the business is the policy owner and it pays the premiums. This cover also has the option to be written in trust should the policyholder wish to do so.
Our Key person calculator can help you work out the value of a key person to determine the sum assured.
Loan protection protects the business against the risk of a loan to the business needing to be repaid in the event of death or serious illness of a loan guarantor. Sometimes lenders may take 3rd party security against these loans and this is often in the form of a second legal charge on the director’s family home. Where this is required, it’s even more important that directors are insured for the full value of the loan in the event of death or serious illness.
Although some lenders will often insist that loan cover is put in place there is growing evidence that this is not always the case and therefore it is always worth clarifying with your business-owning clients what, if any, arrangements have been put in place.
However, in some circumstances directors may have made personal loans to the business using their own personal savings, these are known as ‘director loans’ and require to be re-paid by the business on death. It would be appropriate in these situations to cover the loan by using key person cover taken out by the business on the life of the director.
Shareholder protection protects the financial interests of shareholding business owners, partners or directors against death or serious illness of another business shareholder owner, partner or director.
To help retain control of the business and the estate achieve fair value, the remaining owners need to be able to buy the business share from the deceased shareholder’s estate.
Fair value is likely to be achieved when a fixed valuation of the business is agreed at outset, making it easy to calculate the value of each director/partner’s share of the business and put in place the appropriate level of cover required to buy back the business share from the estate. This will also be exercised by using what is known as a cross option agreement, giving each party the opportunity to enforce the sale or purchase of the business shares.
Our Business valuation calculator can help you work out the value of a business to determine the sum assured.
Relevant Life Cover policies are individual life cover policies. They’re designed to enable employers to offer tax-efficient death-in-service benefits to their employees outside of a registered group life scheme. They are also used for high-earning employees who have substantial pension funds and want their death-in-service benefits to sit outside of their lifetime allowance.
Other tax advantages of Relevant Life Cover:
The payments made won’t form part of the employee’s annual pension allowance.
The premiums aren’t normally subject to income tax because they’re not assessed as a benefit in kind.
The premiums can be treated as an allowable expense for the employer in calculating their tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively' rules.
In most cases the benefits are paid free of inheritance tax because the policy is written in trust and the benefits are paid through that trust.
The policy is owned by the business and the business pays the premiums. The life assured can be a key person within that business. The policy is written in trust for the dependants of the life assured.
Our Relevant Life calculator can help you show your director clients the potential tax-savings of Relevant Life Cover.
Tax rules can change.