Business Assurance
Is a way of protecting the most valuable asset of any business its staff. Life insurance by its nature protects against the ultimate unanticipated event — and success in business relies on anticipating the unexpected. Here are some common ways to ensure your business is protected if the worst should happen.
What is Co-Directors Insurance?
The untimely death of a Co-Director can have a major impact on your business. Having Co-Directors Insurance in place goes a long way in helping the company get back on its feet by providing funds to the other Directors of the business so they can purchase the shares of the deceased from their next-of-kin who may have inherited them. A lot of time family members of the deceased Company Director may not wish to be part of the company as they may neither have the interest or the business acumen to be part of the business so they may welcome the chance to sell their shares.
How Does Co-Director Insurance Work?
You can take out Co-Director Insurance at any stage during the lifetime of a company. You pay a regular premium, the cost of which is based on the cover which is required and the value of the shares of the Director. If the Director dies, a lump sum is paid by the insurer which will enable the insured party to purchase the shares of the deceased Director from their next-of-kin.
Is Having Co Directors Insurance Worth it?
Co-Directors Insurance offers a great piece of mind. In the case of the untimely death of a Company Director, Co-Directors Insurance can provide a lump sum that will allow the insured party to purchase company shares from the next-of-kin of the deceased Directors family. This is important because if the deceased party was a majority shareholder, the company could lose control of the business if the deceased Directors family take part in the running of the firm. Other Directors may not feel happy in circumstances like this as they may feel the family does not have the knowledge or expertise to add value to the business.
What is Partnership Insurance?
Partnership insurance is a type of insurance that is commonly purchased by partners in a business. It generally involves partners purchasing life insurance policies on each other and naming themselves as the beneficiary. This way, if one of the partners dies, the other can use the life insurance payout to purchase the deceased partner's share of the business.
How does Partnership Insurance work?
Partnership insurance protects businesses by helping to prevent a third partner from coming in and purchasing a partner's share when they die. With partnership insurance, the control of the business is generally consolidated into the surviving partner's hands.
What is the Buy-Sell Agreement?
Buy-sell agreements recognize the value of the partnership and work to ensure that in the event a partner leaves the relationship, the remaining partner will have the opportunity to buy them out rather than being forced to accept a new partner who may not be to their liking.
Buy-sell agreements protect each partner’s interest by using contractual terms to determine the value of a partner’s share. A well-written buy-sell agreement will also have trigger mechanisms that compel a partner to relinquish his or her shares. Triggers can include disability, retirement, and death. In the event of death, the deceased partner’s heirs are required to cede control to the surviving partner or partners in accordance with the terms of the buy-sell agreement.
What is the tax treatment of Partnership Insurance?
Life of another:
Capital Gains Tax will NOT apply. The proceeds of the partnership
protection arrangements payable on death or disablement are not liable to CGT under current legislation.
Inheritance Tax will NOT apply. On death the proceeds of the plan are paid to the plan owner where the arrangement has been set up on a “life of another” basis. Under current legislation there will be no inheritance tax liability for the surviving partner (the plan owner) provided he / she has paid the premium for the benefit they will receive.
Owen life in trust:
Capital Gains Tax will NOT apply. The proceeds of the partnership protection arrangement payable on death or disablement are not liable to CGT under current legislation.
Inheritance Tax will NOT apply. On death the proceeds of the plan are paid to the trustee(s) of the plan for the benefit of the surviving partners. The Revenue Commissioners have clarified that the proceeds of such a plan are exempt from Inheritance Tax in the hands of surviving partners, in certain circumstances, to the extent that they use the proceeds to purchase the deceased’s share of the business.
What is Key Person Insurance?
Put simply, Key Person Protection (also known as key man insurance or key person insurance) is a business insuring itself against the financial loss it would suffer if a key person in their business died or were diagnosed with a specified critical illness if chosen, during the length of the policy. It also pays out if the key person is terminally ill and meets our definition, except in the last 12 months of the policy.
Who Are Your Key People?
- They are the ones who steer, create and drive your business
- The people without whom your business would lose sales and profits or without whom even the basic viability of your business would be shaken
- Look at the Directors, Partners, owners and beyond
- Consider the roles of senior managers in sales, technical development and operations - the roles will change in every business but the candidates are sure to jump out at you
- Insuring these people will provide the extra cash needed to take on temporary staff or recruit and train a replacement
Who Provides Personal Guarantees?
When a business takes out a loan or raises bank finance the lender is quite likely to require a personal guarantee or a charge on their personal property. This especially applies to small and new businesses. So what happens if these guarantors become seriously ill or die? The lenders may well be in a position to call in the loan. What happens then? Again, Keyman Insurance is the answer. Insurance can be structured to pay-off the loan and thus free the business and the guarantor's family, from major worry..
How is Key Person Insurance taxed ?
When looking at the tax treatment of Keyman insurance, where the company both pays the premiums and receives the benefits, we need to look at (a) corporation tax relief on premiums and (b) corporation tax charged on benefit pay-out.
Premium Tax Relief:
- Tax relief can only be claimed on key man insurance premiums, where all 4 of the following rules are met and the purpose of the cover is not to repay loans or other outstanding debts.
- Key person must own less than a 15% shareholding i.e. cannot be a proprietary director.
- Key person insurance is intended for loss of profits and replacements costs, as opposed to cover against company loans.
- The sole relationship is employer and employee.
- The policy is a term assurance contract not exceeding retirement age.
Tax Treatment of Benefits:
- Whether tax is charged on a benefit pay-out to the company, is dependent on the intention of the cover:
- Where the keyman insurance is intended specifically to cover revenue loss i.e. loss of profits & replacement costs, corporation tax will apply.
- Where the purpose of the keyman insurance is to cover capital loss, i.e. loans to the company, guaranteed by the key person, then no tax would be chargeable.
Summary:
You can never claim premium tax relief and also avail of tax-free benefits. Where the cover is to protect loans then tax-free benefits can apply, but not premium tax relief. Where the cover is to protect loss of profits premium tax relief may apply, but not tax-free benefits. Therefore, if you need to cover both losses of profits and protect business loans, then having 2 separate policies may make the most sense.
