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Key Person Insurance
The death of key employee can have a devastating effect on
the profits of a company and protection against the adverse
financial consequences of losing such an employee should be
vital part of a company's planning. It is, however estimated
that less than 5% of UK companies have taken out this type
of cover.
Key person insurance can be considered for directors and
employees with many different roles, for example:
- a managing director with a charismatic personality;
- a research scientist with specialist knowledge essential
to the company;
- a skilled engineer with a detailed knowledge of the company's
machinery;
- a salesperson with a wide range of personal contacts.
Amount of cover for key person insurance
A simple method sometimes used to calculate the amount of
cover required under key person insurance is to multiply the
key person's salary by a factor of five or ten.
Since the aim is to replace the profits that might be lost
if a key employee dies or is otherwise unable to function,
a more appropriate method is one that relates the amount of
cover to the employee's contribution to the profits. The key
person's contribution to profit is calculated by assuming
that his contribution is in the same proportion as that which
his remuneration bares to the total wage costs. That estimated
contribution to profit is then multiplied by the number of
years.
Key person policies
The type of policy chosen will depend on the business's specific
circumstances but a typical choice would be a term assurance
for the period during which the employee is a key person.
This might be until retirement, or until the end of a contract
or a particular project.
The policy will be taken out by the company on the life of
the key person.
If a term assurance of five years or less is chosen, the
premiums may be allowed as a business expense. If there are
any claims the policy proceeds received by the company will
be treated as a business receipt and subject to corporation
tax.
To protect in the event of illness or accident, critical
illness cover and or/ permanent health insurance may be arranged.
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