Ask a business owner in Trinidad what would happen to the company if they were out of action for six months and you get one of two answers. Either a confident "the team would manage", which is usually untested, or a long pause, which is at least honest.
The pause is the correct response for most small and medium businesses here, because they are built around individuals. One person holds the banking relationship, the key supplier contacts, the pricing knowledge, the technical capability, or simply the trust that makes customers keep coming back. Remove that person and the business does not gradually decline — it seizes.
What a key person actually is
Not necessarily the owner, and not necessarily the highest paid. A key person is anyone whose absence would materially reduce profits or threaten the business. Typically:
- The founder or managing director, who holds the relationships
- The one technically qualified person the licence or the work depends on
- The sales director who personally holds most of the customer relationships
- The person who holds the personal guarantee on the company's borrowing
- Occasionally, a long-serving operations manager who is the only person who knows how everything actually works
A useful test: if this person did not appear on Monday and never returned, how much would profit fall over the next two years, and what would it cost to replace the capability?
What key person cover does
The company takes out a policy on the life — and ideally also the critical illness — of the key person. The company pays the premiums, owns the policy and is the beneficiary. On death or diagnosis, the company receives a lump sum.
That money buys the one thing the business most needs at that moment: time. Time to recruit properly rather than desperately. Time to reassure customers and suppliers. Time to service borrowing while revenue is disrupted. Time to avoid a forced sale.
Note that this is quite different from personal life cover. Personal cover protects the family. Key person cover protects the business. A family that inherits a collapsing company has not been protected by either.
How much cover
There is no single formula, but four approaches are used, and the sensible course is to calculate all four and take a considered view.
| Method | Basis |
|---|---|
| Multiple of profit contribution | The person's estimated contribution to gross profit × 2 to 5 years |
| Multiple of remuneration | Total cost of employment × 5 to 10 |
| Replacement cost | Recruitment, relocation, training, and the productivity gap during handover |
| Debt protection | Borrowing the person guarantees or that would be called in |
For a business generating TT$1.2 million of gross profit where one person is genuinely responsible for perhaps 60% of it, two years of replacement suggests cover in the region of TT$1.4 million. Businesses routinely insure a TT$300,000 vehicle fleet meticulously and leave that exposure entirely uncovered.
Working out which of these applies to you? A short conversation usually settles in twenty minutes what an hour of reading cannot — because the answer depends on your numbers, not the general case.
Talk it throughThe three arrangements that matter
1. Key person cover
As described above. Company owns, company pays, company benefits. Straightforward, and the most commonly missing.
2. Share purchase (buy-sell) funding
This is the one that prevents family disputes, and it is badly neglected in Trinidad and Tobago.
Two or three people own a company. One dies. Their shares pass under their will — usually to a spouse who has no involvement in the business, no wish to run it, and an urgent need for income rather than shares in an illiquid private company.
Now everybody is stuck. The surviving owners have a co-owner who cannot contribute. The widow or widower owns an asset that pays nothing and cannot be sold. Both sides want the same outcome — the survivors buy the shares — and neither has the cash.
The solution is a cross-option (buy-sell) agreement funded by life policies. Each owner is covered for the value of their stake. On death, the policy pays, and the agreement gives the survivors an option to buy and the estate an option to sell, at a valuation determined by a mechanism agreed in advance. The money exists, the price is not negotiated in grief, and the business continues.
Two things make or break it: the valuation mechanism must be specified and reviewable, and the ownership structure of the policies must be right, because it drives the tax outcome. Get both drafted properly.
3. Loan and guarantee protection
Most bank lending to small T&T companies is personally guaranteed by a director. If that director dies, the guarantee does not die with them — it becomes a claim against their estate, which means against the family home.
Cover written to clear the borrowing removes that exposure entirely. It is often the cheapest and most obviously necessary piece of the whole structure, and it is regularly overlooked because everyone is focused on the business rather than the guarantee.
Critical illness, not just life
The same reasoning as for individuals applies with more force to businesses. A director who is seriously ill for a year is, from the company's perspective, absent — but still on the payroll, still a director, still holding relationships nobody else can service. Life cover pays nothing. Key person critical illness cover does.
The tax position, in outline
Treatment turns on the purpose of the policy, and it is not intuitive.
Broadly, where cover is taken out to protect against a loss of trading profits arising from the death of an employee, is short-term in nature and confers no capital advantage, the premium may be deductible — and, correspondingly, the proceeds may be taxable as a trading receipt. Where the purpose is capital in nature — protecting a loan, funding a share purchase, or where the person is a substantial shareholder — the premium is generally not deductible and the proceeds are more likely to be capital.
You cannot have it both ways, and the arrangement should be structured deliberately rather than by accident.
Get the structure reviewed before the policies are written
Whether a policy is owned by the company, by the individual, or held under trust changes the tax result, the availability of the money, and who controls it. Restructuring afterwards can mean new underwriting at an older age — or, if health has changed, no cover at all. This is a case where an hour of advice before signing is worth considerably more than a review afterwards.
A continuity plan is more than a policy
Insurance funds the response. It does not constitute the plan. A workable continuity plan also includes:
- Documented processes for anything only one person knows how to do
- A second bank signatory, so the company can pay wages in week one
- Access to systems and passwords held securely by more than one person
- A named deputy for each key role, even informally
- Up-to-date company records and a current shareholders' agreement
- A will for each owner that is consistent with the shareholders' agreement — a surprising number are not
The insurance is what gives you the money. The plan is what tells everybody what to do with it. Businesses that survive the loss of a key person almost always have both, and the second one costs nothing but an afternoon.
Building this with Guardian
A complete business protection arrangement usually draws on both Guardian companies:
- Guardian Life — Term Life written on the key person for the sum your profit calculation produced, with the Phoenix Plan alongside it so that a serious diagnosis is covered as well as a death. Group Life and Group Pensions for the wider team, which also help you retain the people you cannot afford to lose.
- Guardian General Business Solutions — FireGuard® Insurance, Liability Insurance, Contract Work Insurance and Money Insurance for the property, liability and project risks that sit alongside the people risk.
The part that needs an accountant rather than a product is the structure: who owns the policy, how the cross-option agreement is drafted, how the shares are valued, and what that does to the deductibility of the premium and the treatment of the proceeds. We do that first, then place the cover.
Noble Accounting & Insurance is an appointed adviser for Guardian Group (Guardian Life of The Caribbean Limited and Guardian General Insurance Limited). Where an article recommends an insurance or annuity solution, that recommendation will be a Guardian Group product, and we are remunerated by Guardian Group when business is placed. Product features described here are drawn from Guardian Group's published material; full terms, benefits, exclusions and premiums are set out in the policy documents and your personal illustration.
General information only. This article sets out general information about accounting, taxation and insurance matters in Trinidad and Tobago as understood at the date of publication. Rates, thresholds, product features, forms and filing procedures change, and the right course depends on your particular circumstances. It is not accounting, tax, legal or financial advice and should not be relied on as a substitute for professional consultation. Please confirm current requirements with the Inland Revenue Division, the National Insurance Board, the Central Bank of Trinidad and Tobago or your insurer as applicable — or speak with us before acting.