My wife and I are directors of a small company with five employees. I manage the finances but my wife has the customer-facing role and drives orders. She had a health scare last year that has made us worry about our ability to continue with the business if she were out of commission for a while. We understand that there are insurance policies that can help businesses with this. Can you explain how they work, please?
Matthew Beck of Smith & Pinching responds:
I am pleased that you have recognised the impact that your wife having a critical illness might have on the business. Many business owners don’t think of their people as business assets: they insure their buildings, equipment and vehicles, but losing a key person can have an even greater effect.
The insurance you describe is known as Key Person insurance. It provides a lump sum if the person(s) named in the policy either dies or falls ill with one of a list of critical illnesses specified in the policy. The lump sum is there as a lifeline for the business. It could be used to replace profits while the named person recovers, to recruit and train a replacement, to pay staff or to restructure the business, for example. In addition, you can arrange for the policy to cover the repayment of business borrowing, if required.
The policy is taken out by the business and premiums paid by the business, so any payment goes to the business. Insurance companies providing this type of policy will often offer support services such as legal helplines and access to medical advice.
It’s important to recognise that there may be other people in the business – such as yourself – whose knowledge and experience may be critical to the business and whose absence would have a significant impact on profitability. Key Person insurance can be set up to cover more than one person, if needed.
You might also like to look at life policies, income protection and critical illness cover as employee benefits for yourself and your wife. Policies of this type can be tax-efficient for both the company and the individual: premiums are paid by the company and may be allowable as a business expense to be set against Corporation Tax liabilities.
This is a marketing communication. Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk
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