When starting a new business, you probably have a lot to do, like marketing, increasing sales, and hiring, among other things. You’ll spend most of your time making sure your business is up and running and going on the right path, such that you forget crucial requirements like insurance.
One of these is the keyman insurance. You need to ask yourself if the business would still survive if you or a significant employee passes away. The answer to this will guide you in making a decision. Read on to learn more about this life insurance type.
What is Key Person Insurance?
Keyman insurance is a type of life insurance policy that offers benefits to a business if the owner or a key employee suddenly passed away or becomes critically ill. Death is not something you’d think about, but if it happens or your employee is away for too long, it could jeopardize your productivity and profits. That’s why you need to be prepared for anything.
A key person is an individual whose death, disability, or critical illness would have significant adverse effects on the company’s profits. The person could be playing a fundamental role in the success or be having a financial stake in the company.
This cover would be essential in any of the following scenarios:
- If the death of a significant staff member, let’s say, a senior salesperson, would threaten the financial ability of the company.
- If it is a partnership and any of the involved parties would like to buy in more shares in case one dies.
- If the reputation and financial viability of the business are linked to the key person’s name, unique skills, or reputation, their death could make the business sink.
- If creditors or financial institutions need collateral for business loans and a key person is required to sign.
What Type of Coverage Should I Buy?
The Insurance Information Institute (III) says there’s no formula for choosing the type or monetary value of the life insurance cover for your key person. However, factors like the size of the company, financial effects of the person’s death, and their yearly salary can help you determine this.
If you go with salary, then the keyman insurance policy should be at least five times this figure. Another insightful factor to look at is how much profit they generate and the cost of finding their replacement.
In terms of ownership, the business’ legal structure will determine the structure of the policy.
Since it is the company paying premiums for this insurance policy, it typically is the owner and the beneficiary if the worst-case scenario happens. The key employee is only required to provide consent to the company.
When they die or fall ill, the company immediately receives the insurance payoff. The proceeds can be used to employ a replacement, pay off debts and employees’ severance or close down the business swiftly.
Where to Buy Key Person Insurance
You can purchase this insurance at any financial advisor, but be sure to consult with an Independent Financial Advisor (IFA) for more insights and advice on the best policies for your business.
The cost of a policy cover depends on several factors like insurance provider, level of cover, and the key persons to be insured.
Is the Insurance Tax Deductible?
The premiums for life insurance policies are not deductible on the federal income taxes of a business. For assurance purposes, keyman insurance is subject to corporation tax relief if:
- It has a five years term or less
- It is not convertible
- It is used for compensation of profit loss after the death of a significant individual.
You, however, have to prove this, and if the plan qualifies for tax relief, any payment made to the business will be taxed at the normal rate of corporation tax. A ‘whole of life’ cover plan is more appropriate for businesses that may need coverage for more than five years.
If your business is typically new, then it’s no doubt you need a key person insurance cover. To determine who the key person is, ask yourself which employee is irreplaceable in a short while? Or whose absence will drastically affect your future profits? These will help you determine who to pay premium covers for. You should understand that a key person’s death could lead to the imminent end of your business. So, do as much as you can to protect it from such a blow.