Protecting Your Business

I write a lot about pensions, investment and protection for individuals. How you can look after your family in the event of sudden death, how you can protect your income if you are unable to work due to illness or injury and how you can maximise your income in retirement through pension planning. However, if you are a business owner, there is a way to protect your business in the event of the death or serious illness of an important member of your team.

As as a business owner, you can protect your business in the event of the death or serious illness of an important member of your team.

This protection is called ‘Key person Cover’ and it is a life assurance policy taken out by an employer on the life of a key employee, who may also be a shareholder or director. This is done to protect the company against any financial consequences of that individual’s sudden death or serious illness.

The sudden death or serious illness of a key person could give rise to a number of immediate financial pressures for the company:

  • Company Loan repayment – in particular any to which the ‘key person’ had given a personal guarantee
  • Potential cost of any extra resources that may have to be committed to the recruitment and replacement of the key individual.
  • Potential cost of an interruption to business
  • Potential loss of business contacts

What is the definition of a Key Person?

A key person is any ‘key’ employee or director on whom the business depends for its continued success, or existence, and on whose death or serious illness the business could suffer a financial loss. You would consider the Directors, Partners, owners and beyond, people without whom your business would lose sales and profits or without whom even the basic viability of your business would be shaken. Roles such as senior managers in sales, technical development and operations should be carefully considered.

In determining the appropriate amount of key person insurance cover an insurable value must be put on the potential financial loss that the company would suffer on the death or serious illness of a key individual. In assessing the amount of cover two important factors to consider are:

  • Loan repayment cover: Any loans personally guaranteed by a key person or any loans made by him or her to the company.
  • Loss of profits cover: The death or serious illness of a key individual could jeopardise the trading position and profitability of the company.

In reviewing these factors, you should be able to determine the estimated financial loss to the company and insure against this appropriately.

Is there a tax liability on the payment of key person cover?

The answer to this depends on the reason for cover. If the cover is used to insure against loss of profits and replacement costs, then the benefit is taxable. However, in certain circumstances, the premium may be tax deductible. However, if the cover is used for loan repayment of share purchase, than the benefit is not taxable and nor is the premium tax deductible.

Smaller companies and start-ups have perhaps the most to lose from the loss of a key person and therefore should review there contingency plans to include this crucial protection for their company.

Here to help your navigate your way to financial security

The Milestone Advisory team are qualified financial services consultants. We specialise in helping professionals in the construction sector and related industries. Our team will work with you to review your finances, explaining your options in clear English.
No jargon – just the facts.

For further information please contact Susan O’Mara via email or phone: (01) 406 8020. Milestone Advisory DAC t/a Milestone Advisory is regulated by the Central Bank of Ireland.