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The Difference Between Key Person & Relevant Life
Key Man or Key Person Insurance and Relevant Life Cover are both forms of Life Insurance - but what are the major differences between the two, if any? For all of their apparent similarities on the surface, Key Person Insurance and Relevant Life Cover actually serve two very distinct and separate purposes.
Yes, both of these types of insurance are owned and paid for by a business. But whereas Key Person Insurance exists to benefit the business, Relevant Life Insurance is for the employee and their family’s benefit. It’s therefore really important to not get these two forms of cover confused.
So, why would you take out Key Person Insurance?
Every business has certain key individuals whose critical illness or death would impact the continued operation and good health of the company. Therefore, it’s this type of insurance that a firm would look into if it wished to ensure funds for business continuity in the event of anything terrible happening to their key people.
Businesses don’t always take out Key Person Insurance purely of their own accord; lenders or investors may also stipulate that such a policy is purchased to protect their stake in the company. Given its focus on the needs of the business itself, any payouts from a Key Person Insurance policy are made directly to the business. It isn’t meant to replace the sales and profits that the missing individual might have generated, but it can contribute to the cost of replacing the given director or partner until they are sufficiently healthy to return to work. It could also contribute to the replacement individual’s training and salary for a period of time.
If a Key Person Insurance policy is taken out for business continuity purposes, the premiums are typically a tax-deductible business expense, as long as they’re taken out on the life of a non-shareholding employee, given that these premiums are wholly and exclusively for the business’s benefit. However it’s important to note that the benefit will be taxed if a claim is made.
If, though, you purchase Key Person Insurance as protection for a loan, you can’t expect the premiums to be tax deductible, due to the premium being for the lender’s direct benefit however you will usually be able to receive the benefit tax-free.
We would always advise you to consult an accountant about the tax implications of purchasing key person cover, given that much will depend on the purpose of the policy and how it is set up.
So, how does Relevant Life Cover differ from this?
Whereas Key Person Insurance is geared towards mitigating losses for a business, Relevant Life Cover protects against the death of an employee from relatives’ perspective by providing a tax-free cash lump sum to their family if they do pass away.
Although it is typically the directors of a business who take out Relevant Life Cover for the protection of their family, it is the business that customarily foots the bill. Micro firms may also take an interest in Relevant Life Cover if they don’t have enough employees to set up a Death In Service scheme, but still wish to provide their workers with a degree of personal Life Insurance.
Another good reason to purchase Relevant Life Insurance through a business, instead of taking out such cover personally, is its high level of tax efficiency. When you set up a Relevant Life Trust, you can typically expect any benefit that your loved ones receive to be tax-free. Furthermore, corporation tax relief, income tax relief and National Insurance relief can all be enjoyed on premiums when you opt for Relevant Life Cover over a personal Life Insurance policy.
Key Person Insurance and Relevant Life Cover also vary in terms of the exact level of cover they provide. The sums assured with the former type of insurance depend on your business metrics and precisely how important a particular individual is to the business. In the case of Relevant Life Cover meanwhile, the sums assured are normally represented as multiples of your remuneration in the form of salary and dividends.
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Alan is the driving force behind the ever growing LifeSearch business protection division, Alan has deep experience in the needs that businesses have to protect them selves and their people and has gained a stellar reputation as an expert with customers, businesses and the industry alike.See all articles by Alan Richardson
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