Key Person Protection
There are two solutions for key person protection for companies:
- life of another
- own life in trust
Under the life of another solution, the company takes out a plan on the life of the key person. If the key person suffers a critical illness or dies, the plan benefits will be paid directly to the company. The funds can be used to meet the company’s financial needs while it re-organises or recruits a replacement. In the case of a critical illness claim, it's possible the key person will return to work, so the funds can be used to pay for a temporary replacement or replace lost profits.
Alternatively, if, for example, the key person is a shareholding director, they can take out a plan on their own life and write it under trust. The potential beneficiaries of the trust would be the other shareholders. In the event of the key person suffering a critical illness or dying, the other shareholders will receive the proceeds of the plan from the trustees and can inject additional capital into the business if it’s needed.
Limited liability partnerships
A limited liability partnership is similar to a limited company in that it has a separate legal persona. Accordingly, it is possible for a limited liability partnership to take out a plan on the life of a key person in the same way as a company.
There are two different solutions for partnerships depending on whether the key person is a partner or an employee.
Partner - Where the key person is a partner, they can take out a plan on their own life and write it under trust for the benefit of the other partners in the firm. Usually, the other partners in the firm will enter into reciprocal arrangements. In the event of death or diagnosis of a critical illness of one of the partners, the proceeds of the plan can be paid to the remaining partners.
Employee - Partnerships in England, Wales and Northern Ireland aren’t separate legal entities. Accordingly, if the key person is an employee, the partnership cannot take out a plan on a life of another basis. In this situation, one of the partners can take out a plan on the life of the key person and write the plan under trust for the benefit of the partners in the firm. If the key person suffers a critical illness or dies, the partners can receive the plan proceeds from the trust. Partnerships in Scotland are separate legal entities. This means that in Scotland if the key person is an employee, the partnership can take out a plan on a life of another basis.
A sole trader may need protection for both themself and a key employee. The sole trader could take out a plan on their own life and write the plan in a discretionary split trust for the benefit of their family. This will ensure that in the event of death, their family will have funds available to settle any business liabilities like, for example, a business loan. The split trust contains a carve-out provision so that in the event of the settlor of the trust (in this case the sole trader) surviving diagnosis of a critical illness by 30 days, the proceeds of the plan will be held for the settlor. In this case, the sole trader can then meet the financial responsibilities of the business.
Clearly, the sole trader will be a key person in the business. However, it is possible they may employ someone who is also key to the success of the business. In this situation, the sole trader can take out a plan on the life of that other key person so there are funds available to meet the financial responsibilities of the business in the event of the key person’s death or critical illness.
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