The Relevant Life/Key Person Conundrum. Springing light on which is best for you

Relevant life insurance and key person protection serve different purposes:

• Relevant Life Insurance is a life insurance policy taken out by an employer to provide a death-in-service benefit for its employees. It is often used as an employee benefit and can be tax-efficient for both the employer and the employee.
• Key Person Protection is an insurance that is taken out by a business to protect itself from the financial loss that may occur if a key person in the company, such as a founder or top executive, were to die or become incapacitated. The policy pay-out helps the company cover expenses like hiring a replacement, covering lost profits, or paying off debts.

Although a relevant life policy is designed to benefit an individual/family, ideally an employer planning to grow their business would have both relevant life and key person policies working together.

In the event of the beneficiary’s death, the proceeds of the relevant life policy will go to the estate of the person insured or would be set up in trust and go to the beneficiary’s family tax efficiently.

• Relevant Life Policies are set up and paid for by a limited company and are usually eligible for corporation tax relief.

This can also include a critical illness policy.

• Approximately 1 in 5 men, and 1 in 6 women, will suffer a long-term illness in their lifetime.
• The average age for critical illness claims is only 47 years old.
• And senior employees who suffer serious illness such as a heart attack or stroke may not return for many months or years, if at all.
• Illness or untimely death of a business principal can place a huge financial burden on a small business.

If Key Individuals within a business were to suddenly fall ill or suffer an untimely death, then key person protection can be there for the company to protect itself against the loss of that employee. What typically happens in small businesses is that if a director or partner falls ill, they still expect to draw an income from the business that their co-directors or partners are continuing to run. At the same time, the business will most likely need to hire someone to replace the director, meaning it has to pay out two salaries.

A key person policy could make a contribution to the cost of the director/partner’s replacement until they are well enough to return to work – these policies are designed to mitigate the financial impact on the business resulting from the loss of a key business principal or employee. Any payouts are directly from the insurer to the business.

As with all protection insurance, a client should discuss their needs and risks with a financial adviser to identify what outgoings require protection. Any policy and premiums would then be tailored accordingly.

In summary, Relevant Life Insurance is focused on providing benefits to employees, while Key Person Protection is about safeguarding the financial interests of the company in case of the loss of a key individual. 

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.