"The premiums on such a policy will be allowable if all the following conditions are met:
- The sole purpose of taking out the insurance is the trade purpose of meeting a loss of trading income that may result from loss of the services of the key person, and not a capital loss. Guidance on possible non-trade purposes is at BIM45530.
- In the case of life insurance policies, they are term insurance, providing cover only against the risk that one or more of the lives insured dies within the term of the policy, with no other benefits. The insurance term should not extend beyond the period of the employee’s usefulness to the company."
The premiums on whole life or endowment policies, or critical illness or accident policies with an investment content – such that premiums contribute to a capital investment – are capital expenditure and will not be deductible, according to HMRC.
Affordability
So key person insurance is seen as important by advisers, and is typically tax-deductible as a business expense – but is key person cover affordable?
Is corporate protection seen as a nice-to-have rather than a must-have, given the cost of living crisis? After all, figures from the Insolvency Service recently pointed to a significant increase in companies going out of business.
March 2023 data showed that corporate insolvencies had risen by just over 37 per cent from February, to 2,457 in England and Wales.
This marked the highest number of insolvencies recorded since monthly records began three years ago.
This could get worse as companies are expected to repay Covid-19 loans, and as inflation continues to bite into corporate profitability (see graph).
Last year, the 42-page Swiss Re Sigma report, "Economic stress reprices risk: global economic and insurance market outlook 2023-24", suggested briefly that "long-tail business, such as liability claims, will be more affected by wage and healthcare inflation in the long term, while the latter will also affect health insurers".
For Liversidge, it is still non-negotiable to keep vital cover in place. He says: “Bosses who are real leaders should be looking at what they are paying themselves and whether there are any fripperies in the business they can cut out.”
He is not the only one.
Roy McLoughlin, director at Cavendish Ware, says: "Key person cover is the last thing that should be cancelled".
McLoughlin explains: "The reality of what will happen to the business if the key players are unable to continue working presses home the understanding of why it is so important to protect the business if these people are not around."
Interest is high
Wesley McCranor, head of protection for PIB Employee Benefits, says he had expected a "cascade" of lapses due to the cost of living crisis, but has found the opposite to be true.
He explains: “As a firm that specialises in corporate protection for companies of all shapes and sizes, I would say there has been a noticeable increase in enquiries over the past three years.
"I was anticipating a cascade of lapses but to my surprise there have been very few.
"This reinforces my narrative that business owners are aware of their vulnerabilities and their business is one of them, particularly if it is heavily reliant on key individuals."
