News details
Protecting key personnel
11/23/2009
Alok Dhanda of Dhanda Financial explains the importance of taking out Key Person Assurance to protect your business should you lose a key member of staff.
There is no doubt that the vital part of any business is its people, and yet many businesses in the UK don’t plan for the worst case scenario – the unexpected death or critical illness of a key employee.
The effect on many companies would be devastating if they suddenly lost one of their key personnel. It would deeply damage the amount of sales and profits that the company is able to achieve, even to the extent that the business cannot continue to function.
The smaller the enterprise, the more vulnerable it is likely to be. As so many of us are still suffering from the setbacks of recession, SMEs are particularly at risk should they lose the key person in their business. Ask yourself the vital question - could you or your business cope?
There are many expenses to take into account should a business lose a key member of staff. Firstly, there is the cost of finding a replacement, involving expensive agency fees, followed by the time it takes to train someone up. Incorporating a new employee fully into the business could take months and may cost thousands of pounds, in addition to their salary, pension, bonuses and unexpected miscellaneous expenses.
On top of this, there is the danger that the viability of bank overdrafts may be placed in jeopardy. If the cash flow of a business is threatened by the sudden death of a key employee, bank managers could demand a recall of money. Similarly, suppliers and shareholders may not prove sympathetic if the worst should happen.
That is why it is so important to take out Key Person Assurance, a form of cover that pays out in the event of a key employee’s death or critical illness. It is designed to protect and compensate a business through a very difficult time.
The full scope of cover available does depend on the type of policy you choose, but you must make sure you can justify the amount of assurance cover you are considering.
The sum assured should reflect the potential loss to the company on the death or illness of the key employee. There are various methods of estimating this value and these could be:
· · Multiple of profits – up to 2 years gross profits or 5 times annual net profit, divided by the number of key persons
· Multiple of salary - the intention here is to provide enough money to recruit a replacement. P11D benefits (such as a company car) should be included in the ‘salary’ figure. The business can normally insure the key person for up to 10 years salary.
The tax
implications of this type of cover vary. Often, the premiums for Key Person Assurance will be allowed as a business expense for corporation tax purposes. However, there may be certain conditions which will need to be met. Where policy proceeds are taxable, the tax payable will be linked to the type of underlying policy.
Payments under a Key Person Term Assurance Policy will normally be treated as a trading receipt and subject to corporation tax. You must remember that the policy is taken out to replace lost profits, as those profits would have normally been liable to tax.
It is essential that you take time to review the cover for key personnel. There have been numerous real life situations where companies have gone into liquidation, when their key director has been killed in car or helicopter crash. It is not worth leaving the situation to chance and putting the hard work of employees at risk, only for the business to be rendered worthless in the event of a death or critical illness.
Key Person Assurance is a complex area and professional advice should be sought from an Independent Financial Adviser who will help you design the most appropriate policy for your business.
For further information on how Alok can help your business with Key Person Assurance, contact Dhanda Financial, 52 Dean Street, Newcastle upon Tyne, NE1 1PG, telephone 0191 255 8960, or email alok@dhandafinancial.com
