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Key protection against the risk of financial consequences to your business

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Key Person Cover

This is protection against the financial consequences to a business that would otherwise result from the death or serious illness of someone who (normally) is employed by the business. Effectively, it is loss of profits insurance.

The value of pensions and the income they produce can fall as well as rise, you may get back less than you invested.

KEY PERSON COVER

A key person could be defined as “anyone with specialist skills or knowledge, or with particularly important areas of responsibility, whose loss to a business would adversely effect its profitability”.

Such a person cannot easily or quickly be replaced and, whilst it is said that no one is irreplaceable, a business can suffer significantly during the time that it takes to find that replacement.

Key person cover is designed to give businesses a cash injection in order that profits are effectively maintained while the best replacement is found.

HOW MUCH COVER SHOULD BE PROVIDED?

A business needs to consider how much the loss of profits would be if the key person died or suffered a serious illness. They should also think about including costs such as, recruitment, training, and loss of goodwill.

They should also consider how long the cover needs to be in place for. How long will it realistically take to find a replacement?

Traditionally, a multiple of salary method has been used when deciding on the necessary amount of cover for a keyperson. This relies on two assumptions: firstly, that it will take the business a number of years to recover and, secondly, that the keyperson’s salary in some way reflects their impact on profits.

Between two and ten times salary is a guideline, so if the key person’s salary is £30,000 p.a. and the company believe that it will take five years to recover its position, then a sum assured of £150,000 is needed.

EXAMPLE OF KEY PERSON COVER

Company A’s gross profits= £5,000,000 p.a.

Company A’s total wage bill= £1,000,000 p.a.

The keyperson’s salary= £30,000 p.a.

Multiply the profits by the keyperson’s salary and divide the figure by the total wage bill:

(£5,000,000 x £30,000) ÷ £1,000,000 = £150,000

If this cover needs to be in place for 5 years, then our sum assured would be £150,000 x 5 = £750,000

WHAT SHOULD THE TERM OF THE PLAN BE?

This depends on the business and the keyperson. Term assurance plans would be more suitable where:

Tax relief on the contributions is required.

  • The keyperson may not remain key in the future.
  • The keyperson is working on a project.
  • The keyperson will be key through to their retirement.
  • The keyperson may not stay in the business long term.

It is not uncommon for short term plans of say five years to be set up on a renewable basis.

A whole of life plan may be more suitable if the keyperson is an owner of the business.

HOW SHOULD THE PLAN BE SET UP?

Whether its life cover, critical illness cover or permanent health insurance that is needed on the key person, it is the business that will want to receive, and therefore control, the benefits. Key person plans are therefore set up on a life of another basis.

WHAT ABOUT UNDERWRITING?

As with all life of other plans, insurable interest will need to be shown. The business will need to be able to demonstrate that the level of cover is reasonable in relation to the contribution that the key person makes to the profits of the business.

WHAT IS THE TAX SITUATION?

If a term plan has been affected, then HMRC may allow the company to obtain tax relief on the contributions if:

  • There is an employer/employee relationship between the life assured and plan owner.
  • The plan is to meet loss of profits only.
  • The plan’s term is no more than 5 year
  • The proceeds of any plan that has obtained tax relief on the contributions will be taxable as a trading receipt.

We advise businesses taking out any form of key person insurance to speak to their local Inspector of Taxes to clarify their individual tax situation.

Very happy to donate some money to the Babbacombe Bay Bloomers.

They are a wonderful group of volunteers who keep St Marychurch and Babbacombe filled with wonderful flowers. Keep the planters fed and watered and dig, prune and tidy-up the beds.
Thank you for all your hard work.
If you are local and fancy donating some money or time please get in touch with them on Facebook.

BABBACOMBE BAY BLOOMERS

#babbacombestyle
#babbacombebaybloomers
#stmarychurchprecinct
#swbest
#torbayfinancialservices
#keepingitlocal
#volunteers
#helpinghand
...

Very happy to donate some money to the Babbacombe Bay Bloomers.

They are a wonderful group of volunteers who keep St Marychurch and Babbacombe filled with wonderful flowers. Keep the planters fed and watered and dig, prune and tidy-up the beds.
Thank you for all your hard work.
If you are local and fancy donating some money or time please get in touch with them on Facebook.

BABBACOMBE BAY BLOOMERS

#babbacombestyle
#babbacombebaybloomers
#stmarychurchprecinct
#swbest
#torbayfinancialservices
#keepingitlocal
#volunteers
#helpinghand

We were so proud to sponsor the U14 girls cup final last night. Congratulations to Plymouth Aspire.
What a fantastic game - such talent and totally professional. We could see great team work and quite a few to become the next generation of England Squad hopefuls.
Well done everyone 👍 👏
#torbayfinancialservices
#plymouthaspireyouth
#plymouth_aspire_girls_fc
#crediton_girls_u14s
#creditonyouth
#devonfa
#cupwinners
#professional
#teamwork
#englandsquad
...

1 week ago

Torbay Financial Services

Can we say just how proud we were to sponsor this match. The girls were amazing and totally professional. It was a cracking game with real talent and team work. Brilliant - well done everyone 👍 👏💯💪⚽🏆Crediton Youth 1-3 Plymouth Aspire Youth ...

2 weeks ago

Torbay Financial Services

It's going to be a great night for footie tonight - really looking forward to a brilliant match. ⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️

We shall be keeping an eye on player of the match 🧐TONIGHT AT COACH ROAD ⚽💙

Crediton Youth 🆚 Plymouth Aspire Youth

Tuesday 14th May 📅

Torbay Financial Services Devon Under 14 Girls Cup FInal 🏆

Kick-Off - 7:15pm ⚽️
...

Its going to be a great night for footie tonight - really looking forward to a brilliant match. ⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️⚽️

We shall be keeping an eye on player of the match 🧐

Tonight we are honoured to Sponsor the Torbay Financial Services Devon Under 14 Girls Cup Final.
Coach Road hosts the final as Crediton Youth take on Plymouth Aspire Youth.
19.15 kick off.

#torbayfinancialservices
#under14girlscupfinal
#crediton_girls_u14s
#plymouth_aspire_girls_fc
#devonfa
#nextgeneration
...

Tonight we are honoured to Sponsor the Torbay Financial Services Devon Under 14 Girls Cup Final.
Coach Road hosts the final as Crediton Youth take on Plymouth Aspire Youth.
19.15 kick off.

#torbayfinancialservices
#under14girlscupfinal
#crediton_girls_u14s
#plymouth_aspire_girls_fc
#devonfa
#nextgeneration
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66 Fore Street
St Marychurch, Torquay
Devon TQ1 4LX

e: PaulGinley@thinkpositive.co.uk
t: 01803 411460   m: 07891 614559

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