For sole traders, the success of their business often depends on their individual skills, expertise, and relationships with clients. To protect against unforeseen circumstances, such as the death or disability of the sole trader, key person insurance becomes crucial. In particular, “life of another” policies offer a unique solution. This article aims to shed light on key person insurance for sole traders, specifically focusing on the “life of another” basis and how it works to provide financial security in times of adversity.
Understanding Key Person Insurance for Sole Traders
Key person insurance is a type of business insurance designed to safeguard companies against financial loss resulting from the loss of a key individual, typically someone who plays a vital role in the business’s success. For sole traders, this cover becomes even more critical, as the business often revolves around their skills, expertise, and relationships.
In the context of key person insurance for a sole trader, a “life of another” policy refers to a specific type of cover where the sole trader insures themselves on the life of another person. In other words, the sole trader takes out the policy and designates another individual as the insured person. This arrangement allows the sole trader to protect their business against potential financial setbacks caused by the loss of that individual.
How “Life of Another” Policies Work for Sole Traders
When a sole trader takes out a “life of another” key person insurance policy, the following key aspects come into play:
Policy Ownership: As a sole trader, you own the key person insurance policy and pay the premiums. You have control over the policy, including the choice of the insured person.
Insured Person: The insured person is the individual designated by the sole trader. Usually, this person is a key employee or someone whose loss would have a significant impact on the business. It could be a trusted employee, a business partner, or a highly skilled collaborator.
Premium Payments: The sole trader is responsible for paying the premiums of the policy, as they are the policy owner. The premiums are typically based on factors such as the insured person’s age, health, and the coverage amount chosen. It’s essential to consider the financial implications of the premiums and select coverage that aligns with the business’s needs and budget.
Coverage and Benefits: In the event of the insured person’s death or disability, the key person insurance policy pays out a predetermined amount, known as the sum assured or coverage amount. This payout provides financial support to the sole trader, helping to cover expenses such as finding a replacement, training a successor, managing the business’s ongoing operations, and potentially offsetting any lost profits.
Business Continuity: The primary purpose of a “life of another” key person insurance policy is to ensure business continuity in the face of the loss of a key individual. By having this coverage in place, sole traders can protect their business’s stability, maintain client relationships, and minimize the financial impact caused by the absence of the insured person.
Is life of another insurance tax-deductible sole trader?
The taxation of sole trader key person insurance is a bit of a minefield. The actual HMRC guidance says
“Premiums paid by a sole trader or partner to provide life, accident or sickness insurance cover for him/herself or a partner are not allowable deductions in computing trading profits. Such insurance policies are often known as permanent health insurance policies”
But it’s not straightforward and easy to understand. In fact, we created a whole article on it! Check out our key man insurance taxation guide for a full and definitive answer.
Getting a Quote For Sole Trader Key Person Insurance
Getting a quote and making comparrisons for sole trader key person cover is pretty easy to do and in fact we use exactly the same quote engine to generate quotes. All you need is the details of the sole trader to be insured. This includes date of birth, smoker status, amount of cover and term. You can get a quote here or give us a call and one of our advisors can talk it through with you over the phone.
For sole traders, the loss of a key individual can have significant implications for their business. “Life of another” key person insurance policies offer a solution by allowing sole traders to insure themselves on the life of another person crucial to their business’s success. By understanding how these policies work and the benefits they provide, sole traders can take proactive steps to safeguard their businesses, ensuring continuity and financial security even in challenging times.