Most Irish business owners spend considerable time protecting their business from commercial risk. They invest in insurance for their premises, their stock, and their equipment. Yet one of the most significant risks of all is frequently overlooked: what happens to the business if a key person is suddenly no longer able to contribute?
Whether through death, serious illness, or long-term disability, the loss of a founder, director, or key employee can be devastating, not just personally, but financially and operationally. The good news is that there are well-established, tax-efficient structures available to Irish businesses to manage this risk. Here is a clear guide to each of them.
1. Executive Income Protection
Unlike the other arrangements discussed here, executive income protection is not a life policy. It does not pay out on death. Instead, it provides a replacement income should a key employee or director be unable to work due to illness or injury.
Given that serious illness is statistically far more common than death during working life, income protection is an important complement to the life-based arrangements above.
How it works
- The business takes out a policy on a key individual
- If that person cannot work due to illness or injury after a defined waiting period, the policy pays a monthly benefit, typically up to 75 per cent of salary
- Premiums are generally treated as a deductible business expense
- The benefit helps the business continue to meet payroll obligations for the individual while they recover, and supports the individual financially during what may be a lengthy absence
2. Shareholder and Partnership Protection
When a business has multiple owners, the death or serious illness of one of them creates a complex set of challenges. Without planning in place, the deceased owner’s share passes to their estate, which may mean a spouse, adult children, or other beneficiaries who have no role in the business suddenly become co-owners.
This can create significant tension and, in the worst cases, force a sale of the business at an unfavourable time.
How it works
- Each owner takes out a life policy on themselves, written in trust for the other owners
- A legal agreement, typically a cross-option agreement, is put in place alongside the policies
- If an owner dies, the surviving owners receive the policy proceeds and use them to purchase the deceased’s share from their estate
- The estate receives fair value, and the remaining owners retain full control of the business
Why the legal agreement matters
The policy alone is not sufficient. Without a properly drafted legal agreement, the surviving owners have no obligation to buy, and the estate has no obligation to sell. Both elements are required for the arrangement to work as intended. We recommend working with a solicitor alongside your financial advisor when putting this in place.
3. Loan Protection
Many businesses carry borrowings that are personally linked to a key individual, whether through personal guarantees, director loans, or mortgages on business premises. If that individual dies, the lender may seek immediate repayment, placing serious pressure on the business at an already difficult time.
How it works
- A life policy is taken out on the key individual, with a sum assured equivalent to the outstanding borrowings
- The business typically owns the policy and is the beneficiary
- On death, the payout clears the outstanding liabilities, removing the immediate financial pressure from the business and protecting its credit standing
Loan protection is often a condition of commercial lending and is worth reviewing whenever the business takes on new borrowings or a director’s circumstances change.
4. Key Person Protection
Key person protection is perhaps the most straightforward of the business protection arrangements. The business takes out a life or serious illness policy on an individual whose loss would have a material impact on the company’s performance.
This might be the founder, a senior sales director, a specialist whose expertise is difficult to replace, or anyone whose absence would directly affect revenue or operations.
How it works
- The business owns the policy and pays the premiums
- If the insured person dies or is diagnosed with a serious illness covered by the policy, the payout goes directly to the business
- The funds can be used to cover lost profits, recruitment and training costs, or to stabilise the business during a period of disruption
Tax Considerations
Revenue treatment of key person premiums and payouts depends on the purpose of the cover. Where the policy is intended to protect income rather than capital, premiums may be deductible as a business expense and the payout treated as a trading receipt. Your advisor will be able to confirm the appropriate treatment for your circumstances.
A business that depends heavily on one or two individuals is carrying significant uninsured risk. Key person protection is often the first conversation we have with new clients.
5. Relevant Life Policies
Relevant life policies are one of the most tax-efficient ways for a business to provide life cover for its employees and directors, yet they remain underused, particularly among owner-managed businesses.
How it works
- The employer takes out the policy on the employee or director
- The policy is written in trust for the employee’s family or dependants
- Premiums are generally treated as a deductible business expense
- Benefits are paid free of income tax, capital acquisitions tax, and outside of the pension lifetime fund threshold
Who benefits most
Relevant life policies are particularly valuable for company directors who would otherwise fund life cover from personal, post-tax income. By funding the same cover through the business, both the employer and the individual can achieve significant tax savings. The policy must meet specific Revenue requirements, so it is important to ensure it is correctly structured from the outset.
For a director paying income tax at the higher rate, funding life cover through a relevant life policy rather than personally can reduce the effective cost of cover by over 50 per cent.
Which arrangements are right for your business?
The appropriate combination of protection will depend on a range of factors, including the structure of your business, your ownership arrangements, any existing borrowings, and the relative importance of different individuals to your operations.
For most owner-managed businesses, a combination of key person protection, shareholder protection, and relevant life policies provides a strong foundation. Loan protection and income protection are then layered in based on specific circumstances.
There is no single correct answer, and the structures involved have meaningful tax and legal dimensions that require professional advice to navigate correctly.
Speak with us
At Baggot Investment Partners, Geoff Whelan QFA, CFP, BFS leads our business protection practice and works with Irish business owners to design and implement protection strategies that are commercially sensible and tax-efficient.
If you would like to explore what is most relevant for your business, Peter and Geoff are offering a complimentary initial meeting with no cost and no obligation. To arrange a time call us directly on 01 554 3678 or email us below
Baggot Asset Management Limited t/a Baggot Investment Partners is regulated by the Central Bank of Ireland
CRO Number: 565467
Central Bank Ref: C143849
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