The need

Many business owners recognise their staff as their most valuable asset and they invest substantial amounts of money in developing the skills of these employees and retaining their services. Within any business there are also key employees with special skills and abilities. The death or permanent disability of such a key employee invariably has a negative impact on the efficiencies and profitability of the business until that employee can be replaced.

The solution

Where key employees contribute substantially to the success of the business, the business can take out insurance on the lives of those people. If a key person then dies or becomes permanently disabled, the business would receive the policy proceeds and could use it to offset the loss of profit or expenses associated with the loss of that person’s contribution to the business. The value of the cover amount represents the value of the key employee to the business in monetary terms.

A Key Person Protection Plan has the following specific benefits:

  • The business can offset the financial losses related to the death or permanent disability of a key person against the policy proceeds.
  • The business can readily fund contingency plans that need to be put in place until it has replaced the key person.
  • There is no substantial time delay in getting operations normalised again.
  • It covers the inevitable huge recruitment and training costs of a new incumbent.
  • It covers the inevitable huge recruitment and training costs of a new incumbent.
  • The creditworthiness of the business remains intact.
  • There is no risk of lost clientele.
  • The monthly cost of the plan is negligible when compared with the benefits gained.
  • The business has a better chance of surviving after the loss of a key person.

Structure and implementation

A Key Person Protection Plan is a life insurance policy that a business takes out on the life of an individual who plays a key role in the business. The business owns the policy and pays the premiums. The cover amount on the policy should cover the total exposure, but other circumstances may dictate a lesser amount and therefore a partial settlement only. In such instances, the risks detailed above partly remain.

The business must exercise an option whether the premiums should be tax deductible or not.

Under no circumstances should a beneficiary nomination or outright cession be recorded on the policy, especially not to the insured life. This may have an adverse effect on the income tax and estate duty status of the policy.

In a properly constructed Key Person Plan:

  • The concept is formalised by way of a clear resolution that reveals its purpose.
  • The underlying product is a non-conforming policy.
  • The cover amount provides for estate duty.