In this month’s Construction Magazine, Susan reflects on the importance of protecting your business.
I write a lot about pensions, investment and protection for individuals. It is important to ask 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.
I have written about this type of cover in the past, however, it bears repeating, particularly considering the number of new businesses in the construction sector and related industries. 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.
So, let’s start at the beginning – Keyperson Cover. This 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.
- Recruitment: The potential cost of any extra resources that may have to be committed to the recruitment and replacement of the key individual.
- Business Interruption: Covering the potential cost of an interruption to business
- Loss of Contacts: Covering the potential loss of business contacts
What is the definition of a Key Person?
A keyperson 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 keyperson 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 “keyperson” 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 keyperson 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.
The cost of Keyperson cover varies by provider and by your age, but you should be able to find a level of cover that suits your needs. Talk to you financial advisor today, and protect the future of your company.
If you have concerns about the current state of your protection cover or are concerned about your future, talk to your financial adviser today. There are no crystal balls, but ensuring you have a plan is a step in the right direction towards financial stability.
For further information, contact Susan O’Mara in Milestone Advisory via email (firstname.lastname@example.org), or phone (01) 406 8020.
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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.
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