Key Person and Partnership Cover Company owners or boards of directors are typically prepared for the worst should they be unlucky enough to fall victim to a factory fire, serious robbery or other eventualities capable of damaging their business. They invariably take their responsibilities seriously in this regard and insure against fire, theft or other potential threats to the company’s future earnings and to its very survival. But how many ever give any thought to the potential loss of earnings and fundamental damage to the business as a result of the loss of a key employee through illness, disability or, worse still, death? Or, for that matter, the unexpected loss of a partner? Far too few, is the simple answer. People willingly insure their homes against fire and damage, or their mortgages in the event of untimely death. Key Person cover is life assurance designed to protect the human assets of a business in the same way that buildings insurance protects a company’s premises. The policy pays a lump sum benefit to the business on the death or specified serious illness of an insured key person. The death or specified serious illness of a partner can also have major repercussions for the future of the partnership. It can cause immediate financial hardship for the remaining partners, possibly even loss of control of the business, and can potentially jeopardise the future of the business itself. Key Person cover
Key Person cover is a policy taken out by a company on a key employee or director to protect the company and provide it with financial aid in the event of the death or disability of that individual. Essentially a key person is a principal, employee or director who plays an important part in the running of that business that his or her removal – either temporarily or permanently – could pose a real threat to its continuation and/or future success. This person may also be somebody in the company who may possess specialised skills or technical knowledge, expertise that is absolutely critical to the well being of that business. The key person could also be a director who has given a personal guarantee in respect of company borrowings, or who has lent money to the company – money that is repayable on his or her death. Key Person cover is needed by a wide range of companies and for a variety of reasons. However, it is generally most important for small and medium sized businesses – companies that typically depend on the expertise and talents of a small number of individuals for their success. The death or disability of such an important employee or employees could threaten the future of the business. Statistics show that slightly more than 70% of businesses cease trading within 5 years of the death of the founder of the business. Apart from those companies who depend heavily on very talented individuals, businesses that really should be considering Key Person cover include those in a start‐up mode, companies that may need to secure financing, firms
operating in niche markets where talented replacement staff may be thin on the ground, and companies where the owner requires liquidity in the event of the death or disability of key employees. The Key Person policy should provide a cash amount on the death of the insured to: • Facilitate the continuation of the business • Replace the Key Person • Repay borrowings if necessary The benefit paid out can offer invaluable help in tiding the company over a period of reduced income, or it can be used to fund a temporary replacement to maintain the company’s economic performance. You can choose both the type of policy, with life cover, income protection and specified serious illness protection available, and also the term of the cover. This, together with the flexibility in the level of benefit you can choose, allows you to compensate for unforeseen events that could cause damage to your business. Key Person protection can cover one or two nominated individuals, who can be a director or an employee. If they die or are diagnosed with a terminal illness, or one of the listed specified serious illnesses, the insurance company will pay a lump sum either on death or shortly after the diagnosis of this disease. Likewise, if this key employee or director is absent from work for a long time, if Income Protection is in place, the insurer can cover the cost of sick pay for that employee. Typically Key Person policies also offer two different protection benefits. • Protecting the business against the loss of a key person. • Protecting the earnings of valued employees when illness or accident strikes. The company taking out cover can choose the level and duration of cover appropriate to the priorities of the business in question, with the added flexibility of being able to increase or reduce these at any time. Other flexible aspects of Key Person insurance are the ability to add, increase, or reduce both main and additional benefits, change the frequency of payments and choose from a range of deferred periods after which the life insurer will pay benefits. Partnership Insurance The legislation governing the operation of a partnership is The Partnership Act 1980. The consequences under this legislation on the death of a partner are twofold: a) the Partnership is dissolved b) Any sum due to a deceased partner, as his/her share of the partnership, has to be treated as a debt of the partnership. This means that the surviving partners, in most cases, will be required to produce a substantial cash sum in order to fund the repayment to the deceased partner’s estate. This
payment might include any capital which the partner had invested in the business, the partner’s share of undrawn profits, and possibly payment for a share of the goodwill of the business, if such goodwill has been recognised by the partners as an asset of the partnership. What would the consequences be if the surviving partners were not in a financial position to make this payment? Having Partnership Insurance can benefit both the remaining partners and the deceased partner's next of kin by providing a lump sum so that the remaining partners can buy back the deceased’s share and thus retain control of the business. It also means that the deceased's next of kin can quickly realise the value of the deceased partner's share of the business. Moreover, it is tax efficient in that the remaining partners can inherit the deceased's share of the business without having to incur inheritance tax.