Arthur BeverlyPWP IFA FU Sept14 keyperson
FINANCE UPDATES
SEPTEMBER 2014
Key person insurance This guide explains key person insurance and outlines the potential risks that can be covered.
Employers must have insurance to cover accidents involving employees at work. But what if something happened to your management team? Key person insurance allows businesses to protect against the financial loss they could suffer as a result of the death or critical illness of an important person in the company.
Who is a key person? A key person is an individual whose skills and knowledge contribute to the continued financial success of a business. For example: •
chairman
•
managing director or CEO
•
marketing manager
•
IT specialist
Anybody whose death or absence could lead to financial loss for the business could be considered ‘key’. As a business you will need to prove that an employee is a key person by showing that you stand to suffer a financial loss as a result of the death, terminal or critical illness of that employee.
2 Stewart Street Milngavie Glasgow G62 6BW 0141 956 5525 [email protected]
Protection UPDATE
Potential risks of losing a key person
Key person insurance cover
Losing a key person could result in significant financial losses as a result of:
Through life assurance or critical illness cover or a combination of the 2, key person insurance can provide a cash injection to the business if an important person dies or suffers a serious illness.
•
losing the main income generator
•
losing a unique skill set or specialist knowledge
•
other staff leaving
•
training and recruiting new staff
•
losing suppliers and customers
•
loss of revenue and profits
•
loss of key relationships and contacts.
Who pays for the policy?
For example: •
loss of profits could be recovered until a replacement is found
•
the policy could pay for the cost of recruitment and training
•
if absence is due to critical illness the policy could pay them an income while also funding the cost of a temporary replacement.
This will depend on the business structure. A company, LLP or partnership would normally own the policy and pay the premiums. However, a sole trader would be the owner of the policy and would pay the premiums. Individuals in a partnership or sole traders will usually place the insurance in a trust for their beneficiaries.
www.abfm.co.uk
Key person insurance How do you work out the sum assured?
•
This will depend on the type of policy you choose. You will need to consider the effect the loss of the key person would have on the business, including impact on profits and the cost of hiring a replacement. Considerations include:
•
Multiple of profits – this is based on the loss of profits caused by the key person’s absence. Calculations may be in the region of 5 times profit for life cover and 3 times profit for critical illness cover. Although this can vary and you will need to consider whether the profit is net or gross.
Tax considerations
Proportion of payroll – this is where the key person’s contribution to turnover is measured and their salary divided by the total payroll then multiplied by turnover, multiplied by the estimated years for the business to recover.
Inheritance tax - Cash from a key person policy could affect a person’s inheritance tax liability.
•
The effect of the key person’s absence on production, sales and profits
•
How long profits would be affected and by how much
•
Finding a replacement
•
Cost of recruiting and training a replacement
•
The effect on future developments and projects
•
The effect on existing customers and key business contacts
The key person leaves or retires
•
The cost of repaying loans made by the key person
Companies and LLPs have 2 main options when a key person leaves the business:
•
The cost of buying back the business interest owned by the key person
1. stop paying premiums
•
Actual impact – this is more detailed and based on loss of revenue less any savings over the period of expected loss and any one off costs.
Taxation of key person insurance can be complex and it is recommended that you seek expert tax advice. Tax on benefits paid - a company will be liable to tax on the plan proceeds if they were eligible for tax relief on payments.
Capital gains tax - Capital gains tax might be an issue if an individual sells their share in the business due to a terminal or critical illness. Income tax - When the trust fund reverts to a partner or sole trader there may be some income tax liability. Tax relief on payments - This will depend on your business structure and also on the type of insurance and level of cover you choose. There are 3 tests to establish if the premium payment is an allowable business expense:
2. assign the policy to the key person, who would become the legal owner and could continue paying the premiums.
•
it must be an employer-employee relationship and the key person must not have a significant stake in the business
Some common formulas used to calculate the amount include:
For partnerships, the policy would automatically revert to the key person.
•
the premium must be to meet loss of profits
•
Sole traders have 2 main options:
•
the premium must be short-term (usually less than 5 years).
•
Potential savings from the absence of the key person.
Multiple of salary – the greater the value of the key person to the business, the higher the multiple will be. It could be in the region of up to 10 times salary for life cover.
Important Notice The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future.
1. stop paying the premiums and allow the policy to lapse 2. set up a trust to transfer the benefits of the policy to another person without giving them full control over it.
This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make any decisions based upon its content.
Contact us We can help you to decide what level of key person cover you need. Please contact us to find out more.
Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. E & OE.
Arthur Beverly Financial Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 485198. Registered in Scotland Number 342744. Registered Office: 22 Backbrae Street, Kilsyth, G65 0NH
SEPTEMBER 2014
Key person insurance This guide explains key person insurance and outlines the potential risks that can be covered.
Employers must have insurance to cover accidents involving employees at work. But what if something happened to your management team? Key person insurance allows businesses to protect against the financial loss they could suffer as a result of the death or critical illness of an important person in the company.
Who is a key person? A key person is an individual whose skills and knowledge contribute to the continued financial success of a business. For example: •
chairman
•
managing director or CEO
•
marketing manager
•
IT specialist
Anybody whose death or absence could lead to financial loss for the business could be considered ‘key’. As a business you will need to prove that an employee is a key person by showing that you stand to suffer a financial loss as a result of the death, terminal or critical illness of that employee.
2 Stewart Street Milngavie Glasgow G62 6BW 0141 956 5525 [email protected]
Protection UPDATE
Potential risks of losing a key person
Key person insurance cover
Losing a key person could result in significant financial losses as a result of:
Through life assurance or critical illness cover or a combination of the 2, key person insurance can provide a cash injection to the business if an important person dies or suffers a serious illness.
•
losing the main income generator
•
losing a unique skill set or specialist knowledge
•
other staff leaving
•
training and recruiting new staff
•
losing suppliers and customers
•
loss of revenue and profits
•
loss of key relationships and contacts.
Who pays for the policy?
For example: •
loss of profits could be recovered until a replacement is found
•
the policy could pay for the cost of recruitment and training
•
if absence is due to critical illness the policy could pay them an income while also funding the cost of a temporary replacement.
This will depend on the business structure. A company, LLP or partnership would normally own the policy and pay the premiums. However, a sole trader would be the owner of the policy and would pay the premiums. Individuals in a partnership or sole traders will usually place the insurance in a trust for their beneficiaries.
www.abfm.co.uk
Key person insurance How do you work out the sum assured?
•
This will depend on the type of policy you choose. You will need to consider the effect the loss of the key person would have on the business, including impact on profits and the cost of hiring a replacement. Considerations include:
•
Multiple of profits – this is based on the loss of profits caused by the key person’s absence. Calculations may be in the region of 5 times profit for life cover and 3 times profit for critical illness cover. Although this can vary and you will need to consider whether the profit is net or gross.
Tax considerations
Proportion of payroll – this is where the key person’s contribution to turnover is measured and their salary divided by the total payroll then multiplied by turnover, multiplied by the estimated years for the business to recover.
Inheritance tax - Cash from a key person policy could affect a person’s inheritance tax liability.
•
The effect of the key person’s absence on production, sales and profits
•
How long profits would be affected and by how much
•
Finding a replacement
•
Cost of recruiting and training a replacement
•
The effect on future developments and projects
•
The effect on existing customers and key business contacts
The key person leaves or retires
•
The cost of repaying loans made by the key person
Companies and LLPs have 2 main options when a key person leaves the business:
•
The cost of buying back the business interest owned by the key person
1. stop paying premiums
•
Actual impact – this is more detailed and based on loss of revenue less any savings over the period of expected loss and any one off costs.
Taxation of key person insurance can be complex and it is recommended that you seek expert tax advice. Tax on benefits paid - a company will be liable to tax on the plan proceeds if they were eligible for tax relief on payments.
Capital gains tax - Capital gains tax might be an issue if an individual sells their share in the business due to a terminal or critical illness. Income tax - When the trust fund reverts to a partner or sole trader there may be some income tax liability. Tax relief on payments - This will depend on your business structure and also on the type of insurance and level of cover you choose. There are 3 tests to establish if the premium payment is an allowable business expense:
2. assign the policy to the key person, who would become the legal owner and could continue paying the premiums.
•
it must be an employer-employee relationship and the key person must not have a significant stake in the business
Some common formulas used to calculate the amount include:
For partnerships, the policy would automatically revert to the key person.
•
the premium must be to meet loss of profits
•
Sole traders have 2 main options:
•
the premium must be short-term (usually less than 5 years).
•
Potential savings from the absence of the key person.
Multiple of salary – the greater the value of the key person to the business, the higher the multiple will be. It could be in the region of up to 10 times salary for life cover.
Important Notice The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future.
1. stop paying the premiums and allow the policy to lapse 2. set up a trust to transfer the benefits of the policy to another person without giving them full control over it.
This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make any decisions based upon its content.
Contact us We can help you to decide what level of key person cover you need. Please contact us to find out more.
Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. E & OE.
Arthur Beverly Financial Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 485198. Registered in Scotland Number 342744. Registered Office: 22 Backbrae Street, Kilsyth, G65 0NH
