Life insurance for executives

Their absence can have many repercussions, not least to the family income and loan arrangements such as mortgages. The payout from any life insurance policy should aim to cover any outstanding debts and provide dependants with a reasonable standard of living.

A life insurance policy is assessed according to the likelihood of the policyholder's death during the agreed term. So, factors such as age, weight, health, smoking, drinking, occupation and hobbies can all influence the size of the repayments.

However, it is not just families that are affected by someone's death; businesses can also feel the loss, especially if the deceased was an executive. Losing the expertise, knowledge and contacts of a key executive can have a devastating effect on any company and many are deciding to insure against it, using Executive Life Insurance or ‘Key Personnel' policies.

In the event that the policyholder is a sole trader, executive life insurance is used either to assist the business compensate the family for the loss of income due to the folding of the company or to cover redundancy payments in the same eventuality. In this case, it is the company that pays the premiums which are put in trust for the family. In the event of a claim, the family then have the ability to decide the fate of the company and can either use the money to keep it going or use it to shut down the business and pay off any outstanding debts.

Partnership-run businesses incur another set of variables. The division of shares should be agreed on taking out the policy, but in the event that that agreement cannot or has not been made, the shares are split equally. For example, if there are three partners running a business and one dies, the other two are liable to pay his or her family the equivalent of one third of the company's worth.

Key Personnel assurance ensures that the company should receive tax relief on the repayments, but the proceeds of the Life Insurance policy will be treated as a trading receipt and taxed accordingly. These policies are generally quite short-term; between 5 and 10 years in length and are designed to include loss of profits in its statutes.

With most of these plans, it is best to link it to when the executive is likely to be leaving the company - through retirement or the end of a contract. It should also be considered how much money that would be needed if that employee were not around; this would need to be index-linked to take into account the rate of inflation.

Due to the complexity and sensitivity of this subject some companies, such as Legal and General Life Insurance, are recommending telephone discussions to support any online applications for this form of Life Insurance.