Key Person Insurance Policy Keyman Life Cover 2023

Do you worry that your company will be adversely affected if a key staff member dies?

If your business is reliant on an individual whose absence will directly affect revenue and potentially put staff at risk, then you should consider keyman insurance.

In this guide, we will look at all aspects of keyman insurance, including who needs it, how much a keyman insurance policy costs, and tax implications. The aim is to help you make an informed decision of whether this insurance provides financial peace of mind for your company.

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What is Keyman Insurance?

Fundamentally, keyman insurance is cover taken out by a firm to insure critical members of staff. An insurer underwrites a policy that will provide a financial lump sum, or the sum assured should an insured employee die—the payout amount funds by paying a monthly or annual premium over the fixed duration of the policy.

What does Keyman Insurance Cover?

A Keyman insurance policy will protect your business against potential financial implications should the business suffer the loss of a key staff member.

Typically, a plan incorporates a life insurance policy element to cover against death; however, it can also include a critical illness element, where the diagnosis of a qualifying disease stops the staff member from working either permanently or for a long time.

Income protection can also be a component of a keyman insurance policy, where key people continue to receive a salary even if they are unable to work for some time. 

All policies will have slight variations on the definition of a keyman, as each company will have different key employees that they consider vital to the ongoing financial success of the business.

A payout from key person cover has various uses:

• The cost to recruit and then train a replacement member of staff
• Creating a financial cushion against a potential loss of profits
• The winding down of the business in an orderly manner
• Smoothing over a potential loss of confidence from customers or suppliers
• Helping to cover any problems raising new finance

Who Needs Key Person Cover?

Every business should have key man insurance in place, but UK statistics show only 50% of companies do have this vital type of insurance cover. The employees are a critical asset of any company and making sure that there is business continuity should essential employees, partners company directors or a founder dies or is no longer able to work is crucial.

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Who is a key person?

A key person in a business is a person whose absence, through death, or critical illness could severely impact the revenue of the company. Every business has someone who is a ‘key’ member of staff. The key person can be the company founder or CEO, a high-performing sales director, or an employee with a skill set that is hard to replace.

The answer to specific questions will identify a key member of staff and include:

• Would the absence of a key employee member affect any essential projects?
• Do any company loan repayments depend on a particular person?
• Is a large client order at risk due to the absence of a critical person?
• Would suppliers get itchy feet and amend the terms of supply?

What Is the Level of Keyman Insurance Needed?

Several areas drive the level of keyman insurance that you should consider. They can be discussed in greater detail with a broker or financial advisor but as a rule of thumb consider this most important factor: Take the keyman’s annual salary and take a multiplier of 5 as the minimum level of cover for consideration. If the founder of a small business earns £250,000 per annum, then the key man insurance cover would be £1,250,000.

The following can also be a consideration when considering the level of cover as well as the key person salary:

• Profit multiples to protect the revenue and profit of the business
• The recruitment costs to employ a replacement
• The cost to pay off any debt associated with the keyman

Setting Up Key Person Protection

When setting up a key man cover, it is vital to consider the legal structure of your business, and your broker or advisor will guide you through it.

There are four main business types which include sole trader, limited company, a partnership, and a limited liability partnership. A sole trader, for example, will see the business owner or a key employee member as the keyman. A limited company, however, will have shareholders and often a founder of the company can be a keyman as well as essential personnel.

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How Much Does Keyman Insurance Cost?

Keyman insurance is quoted either in the form of life insurance only or life combined with critical illness cover.

Different factors will affect the cost of keyman insurance which include but are not limited to the following:

• The length of the cover
• The amount of cover
• Does cover include a critical illness component?
• The age and health of the key person
• Participation of the key person in dangerous activities
• Is the key person a smoker or non-smoker?

Key person cover can start from as little as £5 a month to cover a non-smoking employee aged between 35 and 44 years old on a ten-year fixed term insurance plan.

For an older employee over 55 with critical illness cover included as part of the policy, the cost of insurance may rise to more than £150 a month.

For a quote closely aligned to the needs of your business, Insurance Hero can help. We have experience in providing keyman insurance to different sizes of business, and our professional team of brokers are available to provide a quote on 0203 129 88 66

What About Critical Illness?

Key man insurance can also include critical illness cover as part of the policy. It means a payout is not just dependent on the key employee dying. A lump sum can also be forthcoming following the diagnosis of a critical illness or disease if the key employee survives at least ten days from diagnosis.

A portion of the overall keyman cover will include a premium payment to cover the critical illness portion.

Not all illnesses have cover under critical illness, and it is crucial to clarify or even request the inclusion of specific diseases before the plan starts.

Examples of conditions include but are not limited to, the following:

• Structural heart surgery
• Heart valve replacement or repair
• Primary pulmonary hypertension
• Loss of hand or foot
• Cardiac arrest
• Kidney failure
• Liver failure
• Spinal stroke
• Multiple sclerosis
• Primary pulmonary hypertension
• Major organ transplant
• Traumatic brain injury
• Aorta graft surgery
• Paralysis of a limb

How Can I Buy Keyman Insurance?

Most Insurance Brokers and Financial Advisors offer Keyman Insurance. They will use their expertise to identify key employees in your organisation, select the appropriate level of cover and ensure that your business is fully protected.

Insurance Hero has experience in providing keyman insurance. Our professional team of advisers can run through all aspects of putting in place a robust policy. Contact us at Insurance Hero today on 0203 129 88 66 for a competitive, no-obligation quote. 

Is Keyman Insurance Tax Deductible?

The rules surrounding Keyman Insurance and tax treatment from HMRC it can be quite complicated as it often depends on how a business intends to use any potential payout should a keyman either die or get a critical illness. It is crucial to take out the services and advice of a tax adviser to receive the correct guidance before undertaking a policy.

However, consider the following:

For staff

Keyman insurance is a benefit for a company in the eyes of HMRC which means that any premiums paid into the policy are tax-deductible.

For the shareholders

For Corporation Tax Relief, insurance premiums generally do not qualify as a keyman insurance policy that benefits the shareholders of the company and not the business itself.

For business loans

Key person insurance specifically taken out against a business loan is seen by HMRC as a benefit to the lender and not the company. It means that a business is unable to deduct any premiums paid against the payment of corporation tax.

Additional Features of Keyman Insurance

Keyman insurance policies are very comprehensive, and part of the key person insurance policy will often include the following features:

• A stress and counselling helpline
• Physiotherapy and well-being sessions
• 24/7 access to a GP or medical professional
• Rewards and discounts that can redeem in shops for leading a healthy lifestyle

Other Related Insurance

Key person insurance is a business protection cover. Other types of protection that may be a consideration to protect your company include shareholder protection, business loan protection, and life insurance.

Shareholder protection

Cover to provide a cash lump sum for a surviving shareholder to buy the shares of the deceased shareholder, allowing the remaining shareholder to retain control of the company.

Business loan protection

A cover that repays any debt associated with the company; it includes commercial loans, bank loans, company overdrafts, commercial mortgages, or any other type of corporate debt.

Relevant Life Insurance

This company-paid life cover is designed to go to the insured’s loved ones in the case of death and not as a direct benefit for the business. Relevant life cover is a tax-efficient insurance vehicle providing various tax reliefs on both the premiums paid and the ultimate lump sum financial payout.

FAQs

How long should keyman insurance last?

Keyman insurance is not designed as an ultra-long type of cover as the needs of businesses change continually. Policy lengths of between five and ten years are the most typical duration for keyman insurance.

Should keyman cover be written into trust?

Typically, keyman cover is not written into trust as it is the company that pays the monthly premium for the insurance, and following a successful claim, the insurer will payout directly to the company. It is vital to get the advice of a tax specialist for clarification surrounding trusts for your company.

How important is the critical illness component of a key man insurance policy?

Although key person cover can be a stand-alone plan, the recommendation is to take out the critical illness component. A key person may also suffer a severe illness like a heart attack, a stroke, or cancer diagnosis as much as being likely to die. All are negative for the profitability of the company.