Kathryn Knowles 00:05
Hi, everybody, we are starting off season nine, episode one with a look into key person insurance. This is a very, very useful business protection policy to protect your business in the event that somebody who’s really saying a key person isn’t able to work anymore. This is the practical protection podcast. So we’re gonna go through some of the really key parts of key person covered, don’t worry, it’s not gonna be too long, I’ll give an example of some costing. And towards the end as well. I’m just gonna go through the really key bits that you need to know. And as with anything like this, and I say, on these business, sorry, protection episodes that I’m doing typing key person insurance into Google typing in insurers name. And you will usually find it really, really useful articles, they’re giving you examples, giving you the most recent updates, do always have the cure Insurance website as well, where I’ve done similar, I’ve really broken it down given examples on the key person insurance side of things, I need you off this podcast to refer back to, which is good as well.

So key person cover, basically, what it suggests is somebody that the business will struggle, if they’re not there. Now, it might be that they’re not there temporarily, it might be that they die, and then they’re not back ever again, obviously. But ultimately, it’s where we are saying to somebody, if it’s an employee, so obviously we would maybe look at it if a company director is, is very, very likely a key person and we probably want to make sure that they’ve got keepers and cover. But it might also be an employee might be somebody who does a certain function in a business that it’d be really, really hard. If they weren’t there. Now, that could be something that doing quite Pivotal, in terms of, I don’t know, IT systems, they might be a manager, and that you’re really, really reliant on them. And you know, if they, if those people suddenly unavailable than the company directors are going to have to either try and fulfil that role themselves, which is going to be very intense on top of their usual workload, or they’re gonna have to try and recruit someone else. You know, when we talk about keepers and cover, we’re often thinking about insuring against the loss of business contacts. So maybe that’s straight talk about versus relationships, like this person’s maybe got really valuable connections? And if they, if they’re not there, then is this person going to still want to work with your company? Or they’re going to? Is it do they do they know the company well, or is it just that one person, they have a really key connection with the recruitment of somebody new, and very, very time consuming, very, very difficult to do. And training the new person, obviously, again, very time consuming, very resource intensive, or company, and the lost profits that might be there as well, because of the fact that maybe having to divert people to try and fill this role a little bit, until we’ve got someone in who’s really a paste and everything. So basically, it is an insurance on the company, and if we’re positioning it to employees, as well as basically saying to this person is quite a quite nice compliment, really, to basically say, you are incredibly valuable to us, you know, ridiculously valuable to us, and

03:17
if something happens to you, we are stuck, not massively stuck. And we would really like to take this insurance out on you, obviously, you really do need the person’s permission. And so you know, because we are going to need to go through the full medical underwriting and you know, potentially depending upon the amount of work to do financial, while the financial accounts will be the company’s accounts, not the individual. And but, you know, we are gonna potentially have to go through medicals and things like that. So it’s not something that we can just do. And, you know, that’s it, in a sense, we

Kathryn Knowles 03:45
need to have that person’s permission. So a lot of the time, people have an idea in mind as to how much they would like if a key person just become incapacitated. Now we are talking about life insurance, here, we are talking about things like critical illness cover tune. And what’s going to happen if this person can’t work, and there’s a few different ways that we could might be calculating this now again, as always, you might be speaking to the business. And you might also be speaking to the accountants maybe might even be a financial adviser involved somewhere along the line if you’re suffering, but if your financial advisor it might well be you. So that might be all fine and dandy. But ultimately, there’s there’s few different ways that we might determine the amount of key person cover that we are going to be wanting. So the firm themselves might decide that they want to have a key person cover and that they know, you know, stuff like how much is needed. They might decide to do multiple income. So this might be saying like, well, actually, you know, we’re going to need to really, really cope with this and they might do something like really simple I’d say like five to 10 times the annual salary. That’s you know, stuff like What we’re wanting to be doing, and we feel that that’s a suitable amount, a good amount of insurance. And that can work, they’re both very simple ones, there is more specific things that we can potentially do. And obviously, I will take you take you through that. And the the key things, and I’ll say I forgot to mention is that it can also be income protection cover.

So let’s just say we’ve got life insurance, critical illness, cover and income protection that could potentially don’t fall this, I’m going to focus primarily on the life insurance and critical elements side of things just because again, it’s easy for the podcast without making it too long for every citizen to and my rambling on soon, with the business, because the client is the business. And we, they might decide they might do multiple of income, they might do what’s known as a proportion of profits, which can be a bit of a faff, but some insurers do have online calculators to help you with this a bit of essentially, what you do is you take the person’s salary, divided by the the total salary for the whole company, you then multiply by net profits and then multiply again, by the amount of years, you need to potentially replace them. Obviously, that is doing it in a really, really technical way you can do it. But again, when I was mentioning, I say, again, I said this in the previous episode on shareholder protection, so I’m saying again, I’m thinking back to when I spoke previously. 80% of businesses in the UK are SMEs, a lot of them are small businesses, a lot of them are family run. And sometimes it can be quite difficult for small businesses to so already a lot of the time paying for all the insurances that they need anyway. And, you know, it can sometimes with key person, because it’s often something where we need to explain the need for it to companies, and then see the value of it. And I want it to be as simple as possible, really. So if we, if we’re getting too complicated calculations, it can be a bit like, oh, wow, this is just in the academy. So and especially, they might not want to give you all of their financial stuff, right from the start, you know, that’s some firms well, and I’m not gonna go down the thing of saying, if you will go to advisor, they’ll tell you everything and open you into their arms and everything like that straightaway. Because, you know, I don’t really believe in that at all.

I say I’m a business owner, and if somebody came to me said, Oh, you need this insurance, by the way, I need to know us total, this person’s salary, the total salary, well, your net profits that deliver without knowing any more without knowing the cost, I would just quite frankly, tell them to drag on. So you know, I certainly don’t it wouldn’t matter how good the advisor was that was speaking to me, I would just be a case of saying no, not happening. Give me a ballpark figure that five to 10 times salary probably. And we can chat from there. There’s another option as well, we’ve got a profit base form here as well, which is just simply take the amount of profit that that person makes, and times it by the amount of years needed to replace. So that’s obviously quite a nice, simple one to do. The higher the amount that you go, the more that you’re going to need to justify it though potentially financial accounts to quantify with the insurer depends upon the value, that the business holds how much insurance that person is going to need, you know, we might need to start providing more evidence, not always, but sometimes. Say this is something where we are saying to an employee that we will be lost without them, it’s complementing their value. And it needs to be an employer and employee relationship. And just to obviously clarify that if someone is a managing director of a limited company, they are classed as an employee, because that’s just the way that it is. But it does need to be short term as well, typically five years, possibly 10 years. And it is best to do renewable. The reason that we want to do renewable, as many of us who work in protection, insurance space will be familiar. Things happen all the time, the amount of claims that we see happening in terms of income protection in terms of critical illness cover. It’s a lot and when you’re looking at things now in terms of statistics, we’re now at a point where it’s now more than one or two people will be diagnosed with cancer at some point in their life. And there’s other ones as well, that are just phenomenal. I do quite a bit in terms of like the amount of people that are diagnosed with Parkinson’s or heart attacks and that everyday in the UK, and it’s, and it’s scary, it’s really, really scary.

So the reason we’re going to try and do renewable is is that it’s it’s often a little bit more expensive than just doing five or 10 years. But eventually renewable is the if that person is still there. And if they’re as good as they are, as you as you think they are enough to be able to be doing this insurance as well, then you’re going to hope that they are still with you in 510 years time probably done, we want to be able to make sure that we can carry on this policy without having to go through medical underwriting again. And just you know, the potential issues that we might have at that time. There’s lots and lots of things that can happen in five years or even more so in 10 years. So we want to be on top of that. Now for the technical part with key person insurance, we have what’s known as the Anderson principles. So, if you’re my age, I’m 38 and if you understand you’re obviously naturally going to think of the matrix and Mr Anderson, which is always really nice, because then I kind of go into like matrix mode when I’m thinking of keyperson cover that anyway. So this is a principle from many, many, many, many decades ago. I don’t really know why it’s there, it just is. And it’s just one of those things where it’s like it’s a rule. And we have to follow it. Again, if you ever need to sort of go into this really, really wants to understand it and everything like that reach out to the business protection specialists at insurers. They are incredibly knowledgeable, they do this day in, day out, and they can really, really help. I’ve always found them incredibly helpful, incredibly eager to be able to explain this kind of thing in a really, really understandable way.

But essentially, Anderson principle says that if you have more than a 5% shareholding in the company, you kind of in some ways kind of stop being just someone who has shares, you go malt as into a an actual the business owner. And that doesn’t do anything in the sense of you know, they can still have key person covered. That’s not an issue, but they don’t get the tax advantages on the premiums. So corporation tax relief is allowed on the premiums when there’s less than a 5% shareholding or nor shareholding at all. And so you don’t have to be a shareholder to have key person covered. But it’s an awesome principle. It’s a really specific thing. It brings the shareholder aspects into the key person cover considerations, the basically saying you just will not get the corporation tax relief if you have more than a 5% shareholding. And so as an example, I obviously equal shareholding with Alan and Cura holder cure. Cura even. So, obviously, as a joint business, I, you know, if something if I can find a key person cover, which I do, we don’t get cooperation tax relief, I have more than the 5% shareholding, so. I’m just not allowed him. You can potentially apply to be allowed it to myself to be absolutely not point because, you know, obviously, it’s equal that there’s no way that I can turn around and say, Well, look, I don’t own the company at all. I clearly do.

But there could be that there’s someone who does have a bit of shareholding who doesn’t have anywhere near influencing power, it’s maybe been given us like an employee perk at some point, though, a nice employee perk, obviously. And it’s obviously as well as if it’s over 5%. And what you can do is you can the person can apply to their local tax inspector to see if they can be allowed to get corporation tax relief, it is not guaranteed. And as an advisor, you need to make sure that they’re aware of this. And again, think about your demands and needs, let’s say your recommendation report which says to the person, this is what happens if you have this much shareholding you won’t get, you know, the corporation tax relief. Now, that’s why it can be quite useful speaking to the accountants, as these things are happening, because of the fact that they might automatically think there is. So we just need to make sure because ultimately, whilst again, is not our responsibility. And it says in the sense of as the accounting, you know, we’re not doing those payments, we’re not offsetting things against tax, it is our responsibility to make sure that everybody is aware, because the client is the business is very unlikely specialist in keepers and cover the accountant is very unlikely specialist and keepers uncover the very likely aware of it, but not a specialist in it. So just make sure that you are being upright and upfront about what that is. And so that’s pretty much it key person topic. It’s one it’s I think it’s quite nice and simple to be honest. In many ways. It’s just a case, if we’re doing a policy, something happens to you the business is going to benefit because they really really need to cope without you got to make sure or whether they understand principles understood. So to give you an example of that we had as an example of somebody in their mid 30s, nonsmoker. And we’re doing keepers and a couple of children and 50,000 pounds, increasing life and critical illness cover and we did it on a 10 year renewable policy. And that came to 66 pounds per month. So that’s just gives you an idea of the potential pricing on this. Thank you for listening everybody. Next time Matt Ryan is gonna be back with me for the first time in season nine. And we talked about protection insurance and hypertrophic cardiomyopathy, which is a heart condition that I’ve come across quite a bit. And it’ll be interesting, just make sure that we help everybody to understand what that condition is and what it can mean for the different insurances. please do visit the website practical heightened protection dot code at UK to be able to access all of our episodes and also claim your CPD certificate to thanks to our sponsors, the Oxford members. Thank you everybody. Bye