Key Person Cover

Key Person Cover

Why would you need it?

The purpose of keyperson cover is to protect the company from the financial impact of the death or serious illness of a key employee. The company owns the policy, the key individual is the life assured and the company pays the premium.This is not personal cover;  the proceeds are paid to the company and they use the proceeds to insure against loss of trading profits.

What can the proceeds be used for?

The company would use these funds in any way it chooses, for example:

1. Pay off outstanding bank loans

2. Repay any loans made by the individual to the company

3. Recruit a suitable successor

4. Invest the funds in the business

How much cover is needed?

To determine the amount of cover needed to insure a key individual, the following should be considered:

1. Loans personally guaranteed by the individual and/or any loans made by that individual to the company.

2. Estimated loss of profits due to the death or specified illness of the individual, including recruitment costs for a replacement. This can be difficult to estimate and varies by role and experience. A common rule of thumb is to use 5-10 times the individual's current annual remuneration.

What are the requirements to set up the policy?

1. Check the company’s constitution to ensure that they have the authority to put the policy in place.

2. The company must pass a board resolution to record their intention to put the policy in place. This insures the correct tax treatment of the premiums and that the keyperson knows that the cover is not theirs personally or for the benefit of their family.

3. The policy is set up as a “Life of Another policy” whereby:

i The life assured is the individual who is to be insured under the policy, and

ii the company is the policy owner or grantee.

iii The life assured signs the application form, and an Authorised Officer signs on behalf of the company. The company stamp must be affixed over the Authorised Officer's signature. It is recommended that the life assured and the Authorised Officer are different individuals. 

4. A financial underwriting questionnaire must accompany the application if the sum assured exceeds €1.5m, or if the total of all policies submitted by the company exceeds €1.5m.

Are premiums tax deductible?

In most cases the premiums paid are not admissible deductions for Corporation tax.  (see page 6 of the Key Person Guide  which outlines the circumstances when Revenue will allow premiums to qualify for tax relief.).

Are the proceeds taxable?

In most cases the proceeds of the policy will be subject to tax (see page 7 of the Key Person Guide which outlines the tax treatment of these policies).

1. If the purpose is to protect a company loan then the proceeds will be treated as capital receipt and exempt from capital gains tax. No tax liability will arise for the company.

2. If the purpose is to replace loss of profits they would be subject to corporation tax.