The success of the business may rest on one individual and insurance (key man insurance) may be taken out to protect against loss of profits resulting from the death, critical illness, accident or injury of that person. This may provide peace of mind.
As an added benefit, the premiums on such a policy are allowable in calculating the profits of a company or a partnership (but not a sole trader) if the sole purpose of taking out the insurance is to meet a loss of trading income arising from the loss of services of a key person, rather than protecting against a capital loss.
Example:
Jack and Jill are directors and shareholders in the family company. Jack is responsible for generating the business and Jill undertakes the administration work.
The company takes out a key man insurance policy to protect against loss of profits should Jack be unable to work due to illness or death. The premiums are allowable.
However, had the policy been taken out to protect the value of the shares, the premiums would not be allowable.
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