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Introduction
An employer takes out an insurance policy insuring against loss of profits arising from the death, sickness or injury of a key employee. The beneficiary is the employer. In the case of a life insurance policy, it is a term insurance, covering the life of the employee within the term. The term does not extend beyond the period of the employee’s usefulness to the employer.
Things to consider
– The cover amount: It is important to consider the benefit amount when taking out key person insurance. The actual amount would depend on a number of factors, such as the size of the business and the particulars of the person being insured.
– The person to cover: In general, this type of insurance is often taken out to cover executives in the company or partners, since they play a very important role in the organisation. Small businesses where personal relationships are important are also typically covered.
– Revenue or Capital Purpose: The Revenue purpose relates to protection against loss of revenue as a result of a key person no longer being able to contribute due to death, critical illness or total and permanent disability. The capital purpose entitles a business to receive a benefit to help pay outstanding loans, other capital expenses that occur should a partner be forced to exit the business.
– Tax considerations: Since this type of insurance is geared towards businesses, it’s inevitable for tax issues to come up, especially when a claim arises, because it can be a substantial amount.
Summary
The loss of an owner or key personnel whose contributions are integral for a business’ success can be devastating. It can result in a drastic loss of profit, customer base and even reputation. Protecting your business against such risks is often a prudent step toward business continuity, while addressing the concerns of your key stakeholders. The purpose of taking out the insurance is to compensate the employer for the loss of trading income that may result from the loss of the service of the key employee in case of death, sickness or injury.
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