All successful businesses need to protect the financial well being of the company by paying good salaries and implementing tax efficient strategies to attract, retain and reward valuable management and staff.
Unfortunately, that’s where the thinking of many directors ends – pay enough money and we will get the best people.
Few stop to consider what happens to the business should they lose a key driver in a successful firm.
The smaller the enterprise, the more vulnerable it is likely to be to the loss of key personnel through death or serious illness.
The death or permanent incapacity of a sole trader, for example, can literally entail the death of the business.
This is where independent financial advisers could be doing more by suggesting the firm take out cover in the form of keyman assurance to protect against the loss of such expertise and the damage to the firm that could result.
Keyman assurance is a form of life assurance and is a product line we at Cassidy Davis Life are seeing an ever increasing demand for.
This type of protection deals with the 'what if' factor for businesses, especially smaller knit companies where every senior player is important.
Here the proposer and the premium payer is the employer. The life that is to be insured is the key employee and the benefit, in case of a claim, goes to the employer.
The ‘keyman' with regards to keyman assurance would therefore be any person employed by a company for having substantial responsibilities or a special skill set and who contributes significantly to the profits of that organisation.
The process of setting up the policy depends on whether the business is a company or a partnership.
A company, which has its own legal identity, insures the life of a key person for its own benefit.
The proceeds of a claim will be paid to the company and not to the key person's estate or personal nominees.
Turning to partnerships, where the key employee is not a partner, each partner can take out a policy on the life of the key person, or one partner can take out a single policy in trust for all the partners.
Where the key person is a partner, he or she can insure his/her own life in trust for the remaining partners.
The sum assured should reflect the potential loss to the company on the death or illness of the key employee, or alternatively cover is purchased to make provision for the cost of buying the deceased partner’s shares from his/her estate.
And as the key-person policy is a business asset, there are also tax considerations relating to the payment of premiums and the receipt of the proceeds.
Aidan Plumridge is head of marketing and business development at Cassidy Davis, part of Jubilee Group
The views expressed in this article are those of its author and do not necessarily represent those of IFAonline or any other Incisive Media affiliated organisation.IFAonline
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