How companies insure against losing a key person, and how employee benefit schemes work.
What is business protection, and which businesses need it? — Business protection is insurance a company buys against the financial damage of losing a person. Key person cover replaces lost profit, shareholder protection funds buying a departing owner’s shares, and loan protection clears borrowing. Group schemes are different: they are employee benefits, paid for by the company but intended for staff and their families.
Key person insurance: how it works and how much cover to buy — Key person insurance pays the business a sum if a named individual dies or, on some policies, suffers a defined critical illness. The company owns the policy and receives the money, using it to cover lost profit, recruitment and the disruption of replacing that person. HMRC applies a strict purpose test to whether premiums are deductible.
Shareholder and partnership protection, and cross-option agreements — Shareholder and partnership protection puts money in the hands of the surviving owners so they can buy a departing owner’s share, while the family receives its value in cash. A cross-option agreement gives each side an option to buy or sell, exercisable on death or serious illness, without creating a binding sale from the outset.
Relevant life plans explained — A relevant life plan is a single-life death-in-service policy a company takes out on one employee or director, with the benefit written in trust for their family. Tax legislation treats benefits under a relevant life policy as excluded benefits, which is why small companies use them where a group scheme is not available.
Executive income protection for company directors — Executive income protection is income protection owned and paid for by the company on an employee or director. If the person cannot work, the insurer pays the business, which passes the benefit on through payroll with tax and National Insurance deducted. Some contracts also cover employer pension contributions and National Insurance.
Group life insurance and death in service explained — Group life insurance pays a lump sum to an employee’s family if they die while employed — the benefit usually described as death in service. The employer owns the scheme and pays the premiums, cover is normally a multiple of salary, and the benefit is paid through a trust on the trustees’ discretion.
Group income protection explained — Group income protection pays a continuing income to employees who cannot work through illness or injury, funded by the employer. The scheme’s deferred period usually starts where contractual sick pay ends, and claims are tested against the scheme’s incapacity definition. Most schemes also fund rehabilitation support to help people return to work.
Group critical illness cover explained — Group critical illness cover pays a lump sum to an employee diagnosed with a condition on the scheme’s defined list that meets the written definition. The employer funds it as a benefit, cover is usually a multiple of salary or a flat sum, and unlike group income protection it pays once rather than replacing income month by month.
Business loan protection: covering company borrowing — Business loan protection pays a sum to the company to repay borrowing if an owner or key person dies or, on some policies, suffers a defined critical illness. It matters most where a loan carries a personal guarantee, a director’s loan account is outstanding, or a lender covenant is triggered by the loss of a named person.
Tax treatment of business and group protection premiums and pay-outs — There is no single rule. Key person premiums are deductible only if they pass HMRC’s sole-trade-purpose test, and where they do, the pay-out is generally taxed as trading income. Employer provision for death or retirement benefits sits outside the benefit-in-kind charge, and relevant life policy benefits are excluded benefits in law.