Keyman Insurance (sometimes called key person insurance) is a type of business insurance that pays a lump sum to a company in the event a key member of the team should die or become terminally ill. In this guide, we explain exactly what keyman insurance is, what it covers, how it works, what it typically costs and more.
All businesses will have certain individuals who are key to operations, but that's especially true among small companies. Research by Legal & General found that 53% of SMEs would cease trading in under a year if a key person died or became critically ill with many struggling to find a replacement to allow them to get their business back up and running.
Keyman insurance allows a company to protect itself against the financial loss it would suffer should a key person die, or be diagnosed with a critical illness (assuming critical illness cover is taken out with the policy).Keyman cover works in a similar way to an ordinary life insurance policy, but rather than an individual owning it, and paying the premiums, a business does and in the event the employee dies, the company receives a payout, not the individual's family.
A key person is anyone in a business whose skill, experience or knowledge contributes to the success of the business.
A key person could be one of a number of people in the business, such as:
A key person is anyone whose death or long-term absence could lead to financial loss for the business via:
Depending on the level of key person insurance cover you opt for, what is and isn't included will vary. Typically policies will, at a minimum, cover the death and terminal illness of the key person, but you can also opt to cover critical illnesses and long-term disabilities.
Keyman protection comes in two forms:
Pays a cash lump sum to the business if a key person dies or is diagnosed with a terminal illness (with less than 12 months to live).
By adding cover for critical illnesses you're protecting the business should a key person be diagnosed with cancer, or suffer a heart attack or stroke. These are just example illnesses and for a complete list, you should always refer to your key person protection policy documentation.
Unlike traditional life insurance where an individual covers themselves and in the event of their death their beneficiaries receive a payout, keyman insurance is taken out and paid for by a company and, should that key person die, it is the company that will receive a cash lump sum, not the employee’s family.
This is how keyman insurance works:
Choosing whether they would like to include cover for critical illnesses.
The company makes a claim on the key person insurance policy.
The proceeds of the keyman policy are paid to the business.
Businesses can use the benefit received from a keyman insurance policy for a variety of purposes, for example:
Keyman insurance provides a company with business continuity, so it's a type of protection which should be considered regularly. Whether you're just starting out and have a core team of skilled individuals who are fuelling the business's growth, or you're an established firm with a team that's been with you for some time, keyman cover is a sensible choice to ensure you can maintain your company's success.
Small businesses that rely heavily on their directors and founders should, in particular, consider keyman insurance, as losing those influential individuals often leads to business failure. The same is true with a company's most valuable employees like a salesperson, or someone whose technical knowledge would be difficult to replace without a financial cost to the business.
Every business is unique and there's no set amount of cover you should opt for, but there are a couple of methods you can use to try and calculate the level of key person protection required.
You need to work out the individual's value to the business, and to do this you need to try and calculate the proportion of net or gross profit that the key person is directly responsible for. Once you've got that figure, it's usually a good idea to look at quotes for at least two times the amount of gross profit they are responsible for or five times net profit.
Of course, what is right for your business may not follow this rule, which is why we always recommend seeking financial advice from an independent expert when taking out key person protection.
How HMRC taxes key person cover primarily down to who will receive the benefits. The rules can be complicated as they depend on how a business intends to use the policy.
Firstly, if the key person protection plan covers a shareholder or business owner, then the premiums will rarely be eligible for corporation tax relief as the plan benefits someone other than the business. Moreover, a claim for the death of a shareholder usually counts as a "trading receipt", which means HMRC will also tax the payout. If HMRC does tax the key person payout, then you'll need to gross up the benefit. This is the process of insuring yourself for a larger sum than required so that you're left with the correct payout after the taxation.
If the key person insurance is covering key employees, it will usually be seen as benefitting the company and therefore premiums are generally tax-deductible. However, the benefit will still count as a trading receipt so the payout will be taxed.
Finally, if a keyman insurance policy is taken out to as business loan protection, then HMRC sees that as a benefit for the lender, not the business, so the business cannot deduct premiums against corporation tax. In this instance, HMRC usually doesn't consider the key person insurance to be a trading receipt and therefore the payout isn't liable to any tax.
Confused? Don't worry, this is the exact reason why we partner with the independent financial advisers. They're authorised and regulated by the Financial Conduct Authority and can answer any questions you might have.
Much the same as other insurance products, you can buy keyman insurance by going directly to the providers or by going through an independent financial adviser. The benefits of working with an independent intermediary or broker are that they can quickly compare all of the insurers and give you bespoke advice, tailored to your business helping you find a suitable keyman insurance policy.. The service brokers provide is also free, so you can compare key person insurance and get advice without paying a penny.
Similarly to personal life insurance, there are a number of factors which will affect your key person insurance premiums. Some of these you'll have control over, others you won't.
They include:
To give you an idea of the potential cost of keyman insurance we've performed some comparison quotes. The following quotations are based on a healthy non-smoker who lives in London and works as a Managing Director. The key person insurance policy will provide £300,000 of cover for 10 years and we've broken it down by insurance with and without cover for critical illness.
As you can see keyman insurance is an inexpensive form of protection for your business, critical illness being statistically more likely to occur is the more expensive element.
For this reason, many companies compromise on the level of critical illness cover in order to make premiums more affordable, for example, you may decide to cover 5x net profit for life insurance, but only 2x net profit for critical illness dramatically reducing the premiums.
These are the UK's top providers of keyman insurance in no particular order:
With so many providers in the market, finding the right one for your company can be difficult, which is why we always recommend requesting a comparison quote through Business Protection Hub.
There are various other types of business protection insurance that work alongside keyman insurance protection insurance. Click a link below to learn more or to request quotes:
Individual life insurance paid for by a business. Relevant life insurance is a tax-efficient and cost-effective way for directors to get life cover.
Ensure that a well-funded succession plan exists in the event that a key shareholder or partner should die with shareholder protection insurance.
An increasingly popular benefit which pays out a monthly amount to an individual in the event they’re unable to work for a period of time.
Business Protection Hub is a free information and comparison service, helping busy company owners navigate the world of protection insurance. We aim to save you time and money and to further that aim, we partner with 5* rated advisers who are authorised and regulated by the FCA.
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