'Keyperson Cover' has been used to denote a Life Cover policy taken out by a company on the life of one of its employees or directors. There is however, no legal definition of the policies used to provide this cover or any reference to Keyperson or other such policies in any legislation, regulations or case law.
Keypersons with specialist knowledge are instrumental to the business, without whom the business would have a devastating effect. Cover is designed to protect the net, pre-tax profits of small and medium-sized companies in the event of death or serious illness of one or more of the company's 'key' employees. Assessment of the impact of death or serious illness includes looking at the impact on profitability but not on the applicant's income.
In many small, privately-owned businesses, the persons whose loss would cause the greatest financial damage to the business would be the owners, i.e. usually the partners or shareholders - normally shareholding directors. Where the business is run as a sole tradership, the most important Keyperson is also likely to be the owner.
Given that the main criterion to "qualify" as a Keyperson is the person's potential to cause serious loss of income or profit for the business upon death or serious illness, employees of all types, particularly those with special knowledge or skills, can, of course, also be Keypersons. In practice, though, such employed "Keypersons" are less likely to be encountered in small businesses.
In professional partnerships it may well be that as well as the partners some of the firm's employees qualify as Keypersons. Particular attention needs to be given to 'salaried' partners, who although referred to as partners may not have equity interest in the firm and are in reality employees of the firm.
When calculating the extent of any business continuation cover required, there is a focus on the need for liquidity on the death or serious illness of the identified Keyperson. The recommended approach is to draw up a checklist of 'reasons why' funds may be needed on either of these occasions including:
To arrive at the required level of cover, each of these needs must be quantified for each Keyperson.
Our Business Protection Plan is designed to provide funds to the surviving shareholders to purchase the shares of a deceased or seriously ill member. It is important to understand the business concerned, number of shareholders and the value of each shareholding as well as if a double option agreement were in place.
A partnership consists of two or more persons carrying on a business with a view to profit. A general partnership is not a separate legal entity and partners generally have unlimited liability (unless they are a limited liability partnership (LLP), in which case they are considered a separate legal entity and members have limited liability). A partnership has no shareholders or directors.
A shareholder is the registered owner of shares in a company. A shareholder's shareholding in a company will generally reflect their percentage ownership in that company.
Regardless of whether the business is run as a partnership, LLP or limited company, where all the owners are members of the same family, eg. parents and children, and it is to stay that way, then there will normally be no problem with succession when one of the owners dies or becomes incapacitated - the others are likely to take over, with the family usually looking after the dependants of the deceased or incapacitated owner.
However, in businesses run by unconnected parties (or families where succession is not assured) the death or incapacity of an owner is likely to cause serious disruption to the business and problems for both the business and the family of the owner concerned.
In relation to the death of a shareholder or a partner, ideally there should be an agreement so that the surviving business owners have the right to purchase the deceased owner's share of the business. Usually an agreement like this takes the form of a "cross option" - whereby the executors of the deceased owner have an option to sell and the surviving owners have an option to buy the deceased owner's share. Under a "double option" agreement, either party exercising their option can force the sale.
Similar arrangements should be put in place for the circumstance where a business owner becomes seriously ill or incapacitated.
This covers outstanding business loans and other credit facilities. Small businesses rely upon lending from major institutions to allow ongoing trading, so the business must be healthy (profitable) and loans re-payable in line with agreements. Assessment consists of knowing the loan amount, what the loan is for, who the lender is and who is liable for loan repayments.
As well as Relevant Life Cover we offer Life Cover, Serious Illness Cover, Income Protection and Health Cover.
Many companies offer their employees a 'death in service' benefit, which pays the employee's family a lump sum if they die while they're employed. But this kind of benefit doesn't suit every company. It's not normally available to companies with fewer than five employees. And because it's arranged on a group basis, it's hard for employers to offer their most valuable people something special.
Death in service benefit doesn't suit every employee either. High earners with large pension pots can find that it takes them over their tax-free Lifetime Allowance.
Our Relevant Life Policy is a tax-efficient way for your client to give their best people the best benefits. Your client buys a policy for their most valuable employees - just like death in service, it means we'll pay a lump sum if these employees die while still employed. But our Relevant Life Policy is different to a death in service policy because:
Businesses should ensure that they understand the implications relating to tax. Tax issues may include Capital Gains Tax (CGT) and Inheritance Tax (IHT).
Please consult your tax adviser for more about this.
For further details on the tax implications for your client please read our Adviser guide to PruProtect's business solutions.
To ensure that the funds are available in the right hands following the insured event it is often not sufficient to just affect a policy. With this in mind PruProtect not only provides what we believe to be an innovative and "business-appropriate" life assurance and serious illness solution but also essential supplementary draft documentation in the form of the draft Business Trust and two draft Option Agreements to be used:
For sole traders a separate Discretionary Trust is available.
For further details please read our Adviser guide to PruProtect's business solutions.
Top© For use by UK Advisers only. Not suitable for use by consumers.
PruProtect is a trading name of Prudential Health Services Limited (registered number 05933141) and Prudential is a trading name of The Prudential Assurance Company Limited (registered number 00015454). The Prudential Assurance Company Limited provides and manufactures benefits under the plan. Prudential Health Services Limited distributes and services the product and issues the documentation. Companies are registered in England and Wales. Registered offices at Laurence Pountney Hill, London EC4R OHH. All companies are authorised and regulated by the Financial Services Authority. Neither company is affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America.
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