Key Person Income Protection
It is important for a financial adviser to establish what existing cover the employee has because, if the employee already has personal IPI, this may limit the amount of group IPI a company can have on that individual. However, some companies will ignore the personal cover that the individual has.
There are two ways of calculating the amount of cover required for Key Person income protection: Multiple Of Salary and Proportion Of Profits. The amount of cover needed for IPI is likely to be lower than for life assurance because:
- It is always possible that the key person could return to work. If that is the case, some of the problems associated might not occur, especially loss of confidence by the bank or by creditors.
- Even when the key person is unable to perform full duties, they may still be able to act in an advisory capacity. The effect of their absence on the company’s trading might not be felt so keenly.
- The term of benefit payments may be shortened, e.g. to a maximum period of five years.
- There may be other restrictions imposed, e.g. a twelve month deferral period or a maximum policy term.
Income Protection Tax Relief
By their nature the proceeds of an IPI policy are paid to the company as a regular income, and are therefore taxable.
Premiums on IPI policies for key person assurance are normally allowed for tax purposes if the same criteria as for life assurance are met:
- The relationship is employer/employee.
- The cover is short term.
Key Person Sickness and Accident Insurance
The sum assured is paid to the employer to cover loss of profits arising from the key person’s absence.
The sickness element of Sickness and Accident insurance costs more than accident-only cover but costs much less than Income Protection insurance, because the payments on sickness are only paid for a limited period – usually up to 24 months.
All sickness and accident contracts are annually or more frequently renewable, so the insurers may not offer terms at renewal if a person has a disability, has an accident or becomes sick.
A limitation with accident and sickness Key Person cover is that these contracts exclude cover for death from other hazards.