Services – Page 2 – Vsure Financial Ltd | Our mission is to help people find the right home

The Value of Protecting Your Partnership

One of the great risks of a business partnership is that one of your colleagues may die, with his or her share of the business passing to someone else. That person may have little interest in the business or – at worst – may be hostile to your objectives. Equally a partner who suffers a serious illness may want to retain the option of continuing in the business or be compensated for their exit from the business.

The safety net is a pre-arranged scheme to ensure the surviving partners have enough funds to buy out the interest in the business or compensate the deceased’s family.

The following range of options should be considered:

Appropriate life cover to fund the purchase of the deceased’s interest in the business
Advice on a suitable agreement to ensure the partnership continues and the deceased’s dependents or family members are compensated
Arrangements for partners who retire, or who fall seriously ill and are unable to work

Benefits to Partners

In the event of the death or serious illness of one of your partners, you’ll want to ensure that the business continues as smoothly as possible. Partnership Protection sets out the procedures and policies to help you retain control:

Agreements, insurance, and trusts can be established to protect the business against the financial and practical implications of a partner’s death or specified critical illness
Arrangements which can help to ensure your partnership is not automatically dissolved
Helps to protect your business interests against hostile parties, or disinterested inheritors
Funds available to buy out the deceased’s interest in the business at fair market value
Continuity of business prosperity
Avoid the sale of assets to repay the departed partner’s interest in the business
Help retain confidence of employees and customers

The plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse. The policy may not cover all definitions of a critical illness. For definitions of illnesses covered please refer to the Policy Documents.

This Partnership Protection article is intended to provide a general appreciation of the topic and it is not advice.

Other Business Protections

Business Protection

Relevant Life Plan

Business Protection

Partnership Protection

Business Protection

Key Person Insurance

Business Protection

Shareholder Protection

Key person insurance is an important form of business insurance. There is no legal definition for “key person insurance”.

In general, it can be described as an insurance policy taken out by a small or medium sized business to protect that business from potential financial losses that could arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business.

The aim is also to help protect the profits and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but provides a fixed monetary sum as specified on the insurance policy upon the insured person either dying or suffering a critical illness as defined in the insurance policy terms & conditions.

An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.

Who Can be a Key Person?

A key-person can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company.

Taxation Aspects

Based on a set of principles laid down in 1944 by the then Chancellor of the Exchequer, Sir John Anderson, the premiums paid will be allowed as a business expense for corporation tax purposes provided that:

The only relationship between the proposer and the life assured is that of employer and employee (except in the case of shareholding directors – see point 4 below).
The policy is designed to cover loss of profits only.
The policy’s term does not extend beyond the period of the key person’s usefulness to the business.
The employee does not hold a significant shareholding (less than 5% is probably insignificant).

If the premium is a permitted allowable expense, then the policy proceeds would normally be subject to taxation. However, there are no hard and fast rules regarding the tax treatment of premiums and benefits, and each case should be referred to the local Inspector of Taxes for guidance.

It is not the case that if the business decides not to apply for tax relief on the premiums, any proceeds will necessarily be tax-free. The taxation decisions rest with HM Revenue & Customs, and there are reported cases where the Revenue has taxed benefits on which the premiums did not obtain tax relief.

However, such policy proceeds should usually escape tax, unless the proceeds are payable in instalments. As above, each case should be referred to the local Inspector of Taxes for guidance before the policy is implemented.

It is therefore very important that the effects of taxation should be considered when setting the sum assured on key person cases.

These types of plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

Information regarding taxation levels and basis of reliefs are dependent on current legislation and individual circumstances, are not guaranteed and may be subject to change

This Key Person Insurance article is intended to provide a general appreciation of the topic and it is not advice.

Other Business Protections

Business Protection