WHAT IS KEYMAN COVER?

Keyman (or Key Person) Cover is an insurance policy that helps to absorb and minimise any disruption to your business in the event of the death or disability of your business key person. This could be a partner, a board member, director, salesperson, an employee with specialist skills and knowledge, or even you as a business owner.

As a form of corporate-owned insurance, Keyman Cover is most often favoured by both large companies and smaller partnerships, it provides financial protection against the loss of revenue, profits and the capital value of a business, should a key person suffer a major illness, injury or even death.

HOW DOES KEYMAN COVER WORK?

Essentially, a Keyman Cover insurance policy is owned and paid for by the company itself, meaning that any payout of the policy would go directly to the company. In this way, the policy is designed to pay out a lump sum to the business in the event of the key person’s illness, injury or death.

WHY IS KEYMAN COVER IMPORTANT?

Having Keyman Cover in place can help to protect your business from a series of potentially disastrous consequences, such as:

KEYMAN COVER

As a business owner protecting your assets is of the utmost importance. You may have taken out policies such as public liability insurance, professional indemnity insurance, and even legal cost insurance to help safeguard you and your business from damage or threat, and to ensure the continuity of the company you have worked so hard to build.

But even with all of these policies and procedures in place, have you stopped to consider the impact on your business should you suddenly lose the experience and expertise of a valued employee? Would your business be able to survive, or would you lose time, money and perhaps the business itself trying to replace such an invaluable asset?

The solution to this potentially devastating situation is Keyman Cover – one of the most overlooked business insurance policies, yet one of the most vital as well.

BUSINESS ASSURANCE - “Protecting your Legacy”

• Financial losses to your business, including profits and sales.• The loss of important personal and business contacts.• The loss of integral specialist knowledge and experience.• Loss of time while finding a suitable replacement, or

upskilling one from your current staff pool.• An increased workload for staff in the interim.• A possible change to the nature or way you do business.• And in the worst case scenario, the closing of your

business itself.

WHAT ARE THE BENEFITS OF KEYMAN COVER

While not having Keyman Cover in place could ultimately prove damaging to your business, there are a number of addi-tional benefits that come from protecting your most valuable human capital:

• Necessary funds for the recruitment, training and development of new employees.

• Immediate cash for the repayment of any loans made to your business by the key person.

• The protection of the continued existence and growth of your business.

• The continued reputation and creditworthiness of your business.

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STRUCTURING KEYMAN COVER

To effect Keyman Cover, there are a number of steps that first need to be taken:

1. The financial value of your key person will first need to be established. This can be done through multiplying their salary, judging the number of years it would take for a replacement to reach their level of expertise, or itemising the cost of replacing the key person.

2. Once the financial value of the key person has been deter-mined, you will need to take out a life insurance policy against their life, with disability and severe illness cover included. This policy will need to be able to cover the financial loss of the key person suffering an illness, injury or death.

3. All the relevant documents will then need to be completed and signed, making the policy official.

INCOME TAX IMPLICATIONS

You have the following choices regarding your premiums and can choose whether:

• Premiums are tax-deductible and the proceeds are taxable or• Premiums are not tax-deductible and the proceeds are

tax free.

Should you want the premiums to be tax-deductible, the pro-ceeds will be taxed and it is therefore prudent to increase the cover amount so that the after-tax proceeds are enough to cover your needs.

Requirements for the premiums to be tax-deductible.

In terms of sec. 11(w)(ii) of the Income Tax Act an employer or company may deduct the paid premiums of a policy on the life of an employee or director from the income of the business, if the policy complies with all of the following conditions:

• The employer/company is insured against any loss by reason of the illness, injury or death of the employee/director.

• The policy is a risk policy with no cash or surrender value.• The policy is not owned by a person other than the employer/

company at the time of payment of the premium.• In respect of a policy entered into on or after 1 March 2012

the policy agreement states that this paragraph applies in respect of premiums payable under the policy; or before 1 March 2012, it is stated in an addendum to the policy agreements by no later than 31 August 2012 that this paragraph applies in respect of premiums payable under the policy.

ESTATE DUTY IMPLICATIONS

Estate duty is currently 20% and is levied on the net value of the estate exceeding R3.5 million.

In terms of the Estate Duty Act, policies on the life of the deceased owned by a third party are deemed property in their

estate. This means that the proceeds of a policy on the life of a deceased may attract estate duty, irrespective of who the owner of the policy is.

There are a number of exceptions, for instance where a business takes out a policy on the life on an employee (key person), the proceeds will not attract estate duty, provided the requirements in section 3(3)(a)(ii) of the Estate Duty Act are met.

REQUIREMENTS FOR ESTATE DUTY NOT TO APPLY

• The policy must not be effected by or at the insistence of the deceased.

• No premium on the policy must be paid or be borne by the deceased.

• No amount payable and recoverable in terms of the policy may:- be paid or will be paid to the deceased’s estate, and- be paid or will be paid to or used to the benefit of:

• one of the deceased’s family members,• any person who depend wholly or partially on the,• deceased for maintenance,• any company that has ever been a family company in

relation to the deceased.• A “family company” is any company that the deceased, or

the deceased and their relatives collectively, controlled or were capable of controlling directly or indirectly through:

• a majority shareholding or,• any other interest therein or,• any other manner whatsoever.• A “Company” for the purposes of the above definition

includes close corporations and private companies, but excluding companies listed on a recognised stock exchange.

• A “relative” of a deceased (as defined in the Estate Duty Act) is the spouse of the deceased or any person within the third degree of blood relation or any spouse of such a relative, as well as adopted children.

Although estate duty will be levied on the proceeds if the requirements of section 3(3)(a)(ii) are not met, the proceeds that will be subject to estate duty will be reduced by the premiums paid by the business plus compound interest of 6% per annum. The business, as the policyholder, will be liable to refund the estate for any estate duty payable.

Should estate duty apply in your case, you would need to increase the cover amount so that the after-tax proceeds are enough to cover your needs.

CONCLUSION

Physical assets are important to a business, but when one considers the impact that a loss of intellectual assets could have on the future of a company, protecting expertise becomes just as, if not more important. Make sure that every part of your business is protected against the unexpected with Keyman Cover.

Please consult your legal advisor to ensure that the Keyman Cover is structured correctly from a legal and tax point of view.

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