I own a business in partnership with someone else and we are considering taking out key man insurance. Can you advise the amount we will need and how quickly this would be paid out if something was to happen to either of us? Is there any legal document that we should get drawn up and what happens relating to income tax?
To work out how much cover is needed you must first work out how much the business is worth. If you don’t know this your accountant should be able to give you a value. How quickly a claim is paid out will depend on the insurance company. The insurance premiums will not be tax deductible to the business. The flip side of this is that the proceeds received will not be taxable.
The way the insurance works is that you would take out insurance cover on the life of your business partner, and they would take out insurance on your life. In the event of one of you dying the life insurance proceeds effectively funds the payout of their spouse.
Although the insurance proceeds are not taxable, the proceeds received for the half-share of the business will be taxable.
An agreement should also be drawn up that confirms what will happen when one of you dies and how much will be paid and when. You should seek professional advice to get this agreement drawn up.
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