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Keyman Insurance Policy And Key Person Quotes 2024

Elaine Brookes Steve Case

Author: Steve Case - Insurance Expert

Reviewed & Fact Checked By: Elaine Brookes

Updated: 17th May 2024

key man insurance

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

If your business relies on an individual whose absence directly affects revenue and potentially puts staff at risk, you should consider keyman insurance.

This guide will look at all aspects of keyman insurance (also referred to as key person insurance), including who needs it, how much a keyman insurance policy costs, and tax implications. The aim is to help you decide whether this insurance provides financial peace of mind for your company.

Insurance coverage: Shareholder Protection, Key Man Insurance, Relevant Life Cover, Director Insurance Plans. And More

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AspectDescription
PurposeFinancial protection for businesses against loss of key staff due to death, terminal, or critical illness.
ApplicabilitySuitable for all business sizes, covering essential individuals.
BenefitsCovers revenue loss and supports business continuity.
CriteriaDescription
Role in CompanyCritical to company success.
Impact on OperationsSignificant effect on day-to-day operations.
Skills/KnowledgeUnique and hard to replace.
Revenue ContributionA Significant contributor to generating revenue.
Cover TypeDescription
Life InsuranceLump sum on death or terminal illness.
Critical IllnessCovers serious illnesses like heart attack, stroke, and cancer.
FactorDescription
Risk AssessmentAge, health, occupation, smoker status.
Cost DeterminantsProvider, cover level, policy term, critical illness inclusion, age, and medical history.
AspectDescription
Tax TreatmentVaries based on plan purpose and HMRC rules.
Policy BeneficiaryThe business itself.
FeatureKeyman InsuranceRelevant Life Insurance
BeneficiaryBusinessEmployee’s loved ones

Categories of Loss Covered

CategoryDescription
Protection for ProfitsOffsets lost income from sales, project delays, or cancellations involving a key person.
Shareholder/Partnership InterestsEnables surviving shareholders or partners to buy the deceased’s interests, maintaining control.
Guarantee for Business LoansCoverage equals the value of the guarantee, protecting financial backers.

Benefits of Key Person Insurance

BenefitDescription
Financial ProtectionSafeguards against the financial impact of losing a key person.
Business ContinuityEnsures operations can continue by covering costs associated with replacing the key person.
Debt and Investor AssuranceIt can pay off debts or return investor funds, providing stability.
Recruitment and TrainingCovers expenses for finding and training a replacement.

Key Person Insurance vs Other Business Insurance

Insurance TypeBeneficiaryPurpose
Key Person InsuranceCompanyCovers loss of key individuals.
Relevant Life InsuranceEmployee’s FamilyProvides death-in-service benefits to employees’ families, not directly beneficial to the company.
Shareholder ProtectionRemaining ShareholdersAllows shareholders to buy out the deceased’s share, maintaining business control.

Process and Considerations for Key Person Insurance

Step/ConsiderationDescription
Assessment of NeedIdentify irreplaceable personnel whose loss would significantly impact the business.
Policy Purchase and PremiumsThe company purchases the policy, pays the premiums, and is the policy’s beneficiary.
Use of Death BenefitFunds can be used for recruitment, debt payment, investor payback, or business closure.
Term vs. Permanent Life PoliciesTerm life policies are cheaper but temporary; permanent policies cost more but offer lifelong coverage.
keyman insurance vs life insurance

What is Keyman Insurance?

Fundamentally, key personnel 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 permanently or for a long time.

Income protection can also be a component of a key man insurance policy, where key people continue to receive a salary even if they cannot 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 have this vital type of insurance coverage.

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 die or is no longer able to work is crucial.

Keyman Life Insurance Quotes: Get over £200k of Key Person Insurance from £7.60 Per Month- Compare Top 10 UK Insurers

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keyman insurance benefits

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?

Key Man Insurance Benefits

  1. Financial Stability: Provides a financial safety net to the business in the event of the loss of a key employee.
  2. Business Continuity: Ensures business operations can continue smoothly by covering financial losses due to the absence of a key team member.
  3. Debt Protection: Helps in servicing debts or loans that the key person might have been responsible for.
  4. Investor Confidence: Increases confidence among investors by safeguarding the business’s future.
  5. Employee Retention: Demonstrates a commitment to employees, potentially aiding in retaining and attracting top talent.
  6. Training and Recruitment: Covers costs associated with recruiting and training a replacement for the key individual.
  7. Loss of Revenue Coverage: Compensates for potential loss of revenue that might occur due to the absence of a key person.
  8. Risk Management: Acts as a risk management tool, providing business owners and stakeholders peace of mind.
  9. Tax Benefits: Potential tax benefits, as premiums, are often considered a business expense (subject to UK tax laws).
  10. Flexibility and Customisation: Offers flexibility in terms of coverage options and can be tailored to fit specific business needs.

What Is the Level of Keyman Insurance Needed?

Several areas drive the level of key man 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.

  • 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: a sole trader, a 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, the founder of the company can be a key man or another essential member of personnel.

Key person insurance quotes from top 10 UK insurers. Get prompt quotes today. 60 seconds to compare.

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key person insurance policy

How Much Does Keyman Insurance Cost?

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

  • The length of the cover
  • The amount of cover
  • Does the 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 keyman protection insurance 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

Key man insurance sole proprietorship?

Life insurance for a sole proprietor does not fall under the category of key employee life insurance. In essence, when the sole proprietor passes away, the sole proprietorship also ceases to exist.

Consequently, any financial liabilities or losses incurred due to the death of the sole proprietor are transferred to the proprietor’s estate rather than the business itself. The purpose of life insurance in this context is to manage these financial obligations.

When a sole proprietor owns a life insurance policy that insures a key employee, this is called key employee life insurance.

What About Critical Illness?

Key worker 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 key person cover will include a premium payment to cover the critical illness portion.

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

  • 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.

As a keyman insurance broker, 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 key employee life policy quote.

Is Keyman Insurance Tax Deductible?

The rules surrounding Keyman Insurance and tax treatment from HMRC 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. Insurance Hero is happy to help with any matters relating to key person insurance taxation and keyman insurance corporation tax.

For staff

Key man insurance is a benefit for a company in the eyes of HMRC, meaning 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 cannot deduct any premiums paid against the payment of corporation tax.

Is Keyman Insurance A Benefit In Kind?

Key person insurance is not considered a benefit in kind. This is because, in a true key-man policy, no benefit accrues to the key worker or their family.

The company pays the premiums, and the proceeds are receivable by the company, with the key worker’s life or health being insured.

Therefore, there are no PAYE (Pay As You Earn) or benefit in kind problems associated with true key person insurance policies.

Smoking Habits And Their Effect on Insurance Costs

The habit of smoking is widely recognised for exacerbating various health problems. Consequently, this behaviour often leads to increased insurance premiums, particularly in the case of Key man Insurance. Insurers typically adjust their rates if the insured individual is a smoker.

Nevertheless, some insurance providers adopt a ‘neutral’ stance on smoking, meaning they do not impose additional charges on smokers.

To illustrate the financial impact of smoking on insurance premiums, the Insurance Hero team obtained quotations for Key Person insurance from Aviva. These keyman insurance quotes were for a hypothetical scenario involving a healthy 30-year-old business executive seeking £500,000 in level-term coverage over a decade.

Smoker Vs A Non-Smoker
🚬 £35.72🚭 £20.65

Additional Features of Keyperson 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 be redeemed 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 considered 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 five to 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 the company pays the monthly premium for the insurance. Following a successful keyman protection 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.