|
Business assurance is a form of protection a business can take out to protect it from potential dire financial consequences should some person that is critical to the contingency of the business die or become disabled. There are also policies that can be taken out to retain some key person. The purpose of business assurance is to ensure that a business remains a going concern after an unplanned event.
In this editorial I want to discuss one specific type of business assurance namely Key Person insurance. When one operates a small business, or even a large business, it may be that there are key employees without which the business cannot operate. In an engineering business a specific designer or operator may be critical to operating some machines or a sales manager may have relationships with important clients that make this employee invaluable to the success of the business. There is a lot that can be done to retain this person for the business like shareholding or profit sharing etcetera. But what happens if such a key individual should die or become disabled.
In times like these the business may lose its ability to generate sales or production could shut down or be hampered in some way. All of these scenarios may threaten the businesses survival or lead to financial damages that could take the business years to recover from.
This risk can be insured and is called “Key Person Assurance”. It is essentially a policy taken out by the business and paid for by the business on the life of the key person. If the key person were to die or become disabled the policy will pay a lump sum to the business. These funds can then be used to finance the business during the time that a replacement for the key person is found or trained.
Usually the proceeds of a policy forms part of the estate of the insured. This kind of policy however does not form part of the deceased’s estate but is paid out to the business and the estate does therefore not have to pay any taxes on this payout. There are however some rules that must be adhered to for this policy to be treated as such:
-
The key person must not have been the one who took out the policy.
-
The employer must have paid all the premiums (the key person must not have paid any premiums.)
-
None of the proceeds of the policy will be paid into the estate of the key person.
-
No amount will be paid to:
If these conditions are met then the proceeds of the policy will not be taxed in the deceased’s estate.
The company can then use the proceeds of the policy for recruiting a new employee, or train someone to fulfill the role performed by the key person.
You may ask but how does one determine the value of this person and for what amount should he/she be insured. There are various ways to determine the value of this key individual. You need to assess the cost of replacement including recruitment, resettlement, training and/or a higher pay package. What was the key persons’ contribution to the profit of the company?
|
Homepage 
CAR INSURANCE 
LIFE INSURANCE 
