Key Person Insurance pays a lump sum to the business if a member of staff dies or becomes critically ill.
It is important to recognise that this is a policy a business takes out to protect its future profits and the success of the company. As such, the key person in question pays no premium and receives no benefit from the policy.
You set up the policy on the life of another with the business paying the premiums. Also, the insurer pays any benefit back to the business.
Given this arrangement, there’s usually therefore no need to set the policy up in a trust.
In fact, setting up the policy in trust may actually be detrimental, as it could delay the funds going back into the business when you need them the most.
However, while a trust for Keyman Insurance isn’t usually necessary, it’s worth noting that there will likely be some tax implications on a claim from the money going back into the business. HMRC typically treats this as a kind of trading receipt and therefore taxes it accordingly.