What is Keyman Insurance? Do We Need It? How Much Does It Cost?

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19-02-2020

Keyman Insurance – also known as Key Person Insurance – protects your business from the financial impact of losing a key member of staff. This might be the business owner, founder or an employee your company simply can’t do without.

It’s designed to pay a cash lump sum into your business to help you cope with the death or (potentially) critical illness of that key employee. You have two main options in terms of cover:

  • Life Insurance only
    Should a key person die or suffer a terminal illness (diagnosed with less than 12 months to live) the plan pays out a cash lump sum to the business.
  • Life & Critical Illness Cover
    Adding Critical Illness Cover also enables the plan to pay out if a key person were to suffer a serious illness such as a heart attack, cancer or stroke.

What Does Key Person Insurance Cover?

It is designed to provide business continuity if a key staff member can no longer perform their job due to serious illness or death. The payout can be used for a variety of means, including:

  • Providing a buffer against loss of profits
  • Paying for recruitment and training of a replacement
  • Repaying outstanding loans
  • Loss of important personal or business contacts
  • Loss of confidence from suppliers and customers
  • Difficulties in raising finance for new developments
  • Loss of detailed knowledge of the business’ processes and systems
  • Winding down a company in an orderly fashion.
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Who Needs Key Person Insurance?

53% of businesses stated they would fold in less than a year if one of their key workers died or suffered a serious illness (Legal & General). How would your company cope?

Despite this apparent risk, Legal & General found that more than half of businesses don’t have any kind of protection. They’re running the risk of severe disruption to business continuity without having cover in place.

Why Key Man Insurance is so important for small businesses…

If the death of a key individual would have a significant impact on your business then it is definitely worth considering this protection, especially given the risks involved.

Most companies have at least one key individual whose loss would cause serious business disruption or even collapse.

The loss of that person’s ambition, talents, vision and drive could have a devastating financial impact on a company.

Josh Martin
Business Protection Expert at Drewberry

What’s the Risk of Passing Away?

According to ONS life expectancy data, the chances of a healthy male passing away within the next 10 years are as follows:

Age 35
Age 45
Age 55
1 in 62
1 in 29
1 in 12

What’s the Risk of Becoming Critically Ill?

Approximately 4 in 5 claims on Critical Illness Insurance policies are made up of the ‘big three’ illnesses: cancer, heart attacks and strokes.

  • Around 1 in 4 new cancer cases diagnosed every year are among people aged under 60 (Cancer Research UK).
  • 50% of people born after 1960 will be diagnosed with cancer at some point in their lifetime.
  • Almost 1 million people in the UK have survived a heart attack and more than 1.2 million people in the UK have survived a stroke or transient ischaemic attack (TIA) – and almost half of these are under the age of 75. (British Heart Foundation).

IMPORTANT NOTICE
Not every incidence of one of the above conditions will be covered by Critical Illness Cover. Less severe incidences may not be included in your policy wording or may only trigger a partial payout, so it’s essential you check definitions carefully.

Life Expectancy CalculatorA bit morbid we know, but this tool works out the risk of you passing away based on ONS Life Expectancy Data
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  • years
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How Much Does Key Man Insurance Cost?

There are a number of factors that will determine the cost of cover. Some of the key policy factors you can control, such as:

  • Level of cover
    The more cover you require the higher the cost of the policy.
  • Length of cover
    The longer the policy term the higher the risk of needing to claim and this is reflected in higher premiums.
  • Including critical illness insurance
    As the risk of suffering a critical illness such as heart attack, cancer or stroke is far higher than dying you can expect significantly higher premiums.

Other personal factors that you have less control over which will still impact on the cost of the policy include:

  • Age
    The older we are, the greater the risk of passing away during the term of the policy
  • Current state of health
    Those with severe health conditions, especially those which might limit life expectancy, will typically pay more for key person insurance to reflect the greater risk the insurer is taking on.
  • Smoker status
    If the key individual smokes, they are at greater risk of developing a serious, fatal health condition and so insurers will charge more.
  • Lifestyle and hazardous activities
    Lifestyle habits, such as regularly drinking more alcohol than is recommended, or participating in hazardous activities, could result in an insurer increasing the cost of the cover.
  • Family history
    Has any of the key individual’s immediate family ever suffered a serious and / or hereditary illness that could impact on them? If so, the premiums may be increased to reflect this.

Average Cost of Key Man Insurance Policy

We have calculated the monthly cost of Keyman Insurance split out into Life Insurance and Life Insurance with Critical Illness Cover for a healthy non-smoking individual aged 35, 45 and 55.

They’re looking for £150,000 of level cover (i.e. cover that will remain fixed throughout the policy term).

Age
5 Year Policy
10 Year Policy
15 Year Policy
Cost of Life Cover Only
Age 35
£6.21
£7.10
£7.88
Age 45
£10.51
£12.66
£13.73
Age 55
£21.40
£26.78
£33.55
Cost of Life and Critical Illness Cover
Age 35
£27.51
£32.56
£35.89
Age 45
£59.38
£72.21
£81.25
Age 55
£130.40
£158.57
£179.15
These quotes were calculated on February 8th, 2020

You can use our Key Man Insurance quote calculator to get instant online quotes from the UK’s leading insurers including AIG, Aviva and Legal & General.

How is Keyman Insurance Taxed by HMRC?

The tax treatment of such a policy by HMRC will be dictated by the purpose of the plan and, ultimately, who is to receive the benefits. The rules can be complicated.

How the policies and benefits are taxed can appear quite arbitrary depending on how they’re going to be used.

Protecting Shareholders…

If a plan benefits anyone other than the business — such as a lender or the company’s shareholders (including shareholding directors) — then, by definition, it won’t be ‘wholly and exclusively’ for the benefit of the business. For this reason, it’s unlikely that the premiums will be eligible for corporation tax relief.

Meanwhile, payouts on plans that cover the company’s shareholders usually count as a trading receipt, which means that they’ll also be taxed. So it’s worth remembering that policies that benefit shareholders could be taxed on the way in, and on the way out.

Covering Employees…

By contrast, policies that cover employees are usually regarded as being for the benefit of the business, in which case the premiums should be tax deductible.

However, the benefits still count as a trading receipt (so they’ll be taxed). This means that these policies will also need to have their sums assured grossed up so the business is left with the appropriate amount to protect the business.

Protecting Business Loans…

Policies to protect a business loan are taxed differently. As the cover benefits the lender (not the business), the premiums can’t be deducted against corporation tax.

However, as the payout from the policy is intended to rebalance the company’s capital account it’s not generally classed as a trading receipt and so isn’t typically liable to any tax. This means that there’s no need to gross up such policies, which naturally reduces the premium.

The details above set out the general consensus on how it is taxed however we strongly recommend discussing your specific situation with your accountant.

Other Types of Business Protection

Keyman Insurance is one option to protect your business should an important individual within your company pass away, but there are also other Business Protection Insurance options to consider, such as:

Legacy Planning with Shareholder Protection

Shareholder Protection Insurance is designed to make it possible for the surviving / remaining shareholders to repurchase the deceased / absent shareholder’s shares, retaining control of the company.  It can work alongside Keyman Insurance to ensure a business is fully protected should an important shareholder die or become critically ill. However, rather than paying out to the business to make up for lost profits etc., Shareholder Protection pays out to a shareholder’s fellow shareholders.

Should a shareholder die, their shares typically pass to their family, which could have major implications for the future success of the business if the family has no aptitude for running the business but is entitled, thanks to their inherited shareholding, to a proportion of the profits.

Shareholder Protection prevents such a situation for the business, as well as ensuring a deceased shareholder’s loved ones are properly compensated for their shares.

Debt Protection with Business Loan Insurance

Business Loan Protection is an insurance policy designed specifically to repay outstanding corporate debt such as company overdrafts, commercial loans, venture capital funding and commercial mortgages.

It’s typically arranged as a decreasing Life Insurance policy, meaning that the value of the payout falls in line with the outstanding loan.

Personal Protection with Relevant Life Insurance

Many company directors choose Relevant Life Insurance because it’s a far more cost-effective method of securing Life Insurance over paying for it personally.

Thanks to the trust set up at the time you buy the policy, there’s no inheritance tax or corporation tax issues on the payout because the money doesn’t go into the deceased’s estate or back into the business in the event of a claim.

What’s the difference between Relevant Life Cover and Keyman Insurance?

Unlike Key Man Insurance, Relevant Life Insurance is designed to compensate the family of the director should the director pass away.

It’s still owned and paid for by the business and is eligible for corporation tax, income tax and National Insurance relief, which is how it generates its cost savings over a personal plan, which is paid for after all of those taxes / contributions have been deducted.

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Common Keyman Insurance Questions...

  • How much cover do we need?

    We’ve found that, whatever business our clients may be in, the one thing no company owner wants to think about is how the death or illness of a key worker will impact their business. This can complicate the process of calculating the right level of cover.

    Increasingly, it can be external investors or lenders that help to define the level of cover that is required.

    Some will require a benefit that’s at least sufficient to protect the value of their investment. More demanding investors might also want to see their projected returns covered too. Even so, it often comes down to the business itself to decide who its key people are and upon who it depends most.

    How to Value Your Business for Insurance Purposes

    One broad rule of thumb is that a key individual should be covered up to either twice their contribution to gross profits or five times their contribution to net profits, but this isn’t a fixed formula.

    The value of your policy will depend on your business and the people you’re insuring, which is why it’s always best to get expert advice.

  • Do we need to include Critical Illness Cover?

    For business continuity purposes, the best policies will include Critical Illness Insurance alongside a basic Life-only policy.

    This is because suffering a serious illness such as a heart attack, cancer or stroke is far more likely than a sudden death but can have the same devastating impact on your business.

    The long-term loss of a vital employee through illness could exert a financial strain on the company and lead to uncertainty. For instance, you might need to hire and train an interim replacement.

    Should a key individual suffer a life-changing illness, the capital injection provided puts the mechanisms in place to ensure that a business can meet these costs while continuing to trade.

  • How long should Key Man Insurance last?

    When setting up your policy you will need to decide how long you would like it to last for. There are no hard and fast rules for this – it comes down to how long a key person will remain business critical.

    Understandably, companies can be tempted to look for the shortest term available as this naturally brings down the premiums.

    However, doing so can often be a false economy. When the cover expires, if it then needs to be renewed it will certainly be more expensive due to a key individual’s older age.

    A good rule is to always put the needs of the business first. While most insurers have a minimum term of 5 years for key person protection, you can get cover for longer periods.

    Think carefully if you’re considering taking out very long-term cover.

    • Will business requirements change significantly over a longer period?
    • Will you need a higher benefit, or will the individual no longer be so key to the business as it grows?

    Business requirements naturally change and evolve over time. As such, most key man policies are set-up for between 5 and 10 years and are then reviewed at the end of the term.

  • Can we choose an income over a lump sum payout?

    Although less common there are some insurers who provide a Key Person Income Protection policy where the business would receive regular monthly payments should the key person suffer a serious illness or die.

    You may wish to consider an Executive Income Protection policy to provide a level of sick pay entitlement or cover the costs of an interim replacement if the key individual is too ill or injured to work.

  • Who owns a Key Man Policy and can I change this?

    The policy is owned and paid for by the limited company or limited liability partnership.

    There are certain circumstances, such as if the company ceases trading or if it changes name, where you may want to change the ownership of the policy. You are able to do this through a “deed of ownership” however to make such change you will need to consult your solicitor.

  • Will the Key Person need a medical?

    This is dependent on the age of the key individual and the level of cover that is required. The older the insured or the higher the level of cover the more likely the insurer is to request their GP notes and a medical assessment.

    If you anticipate needing more than £500,000 of cover it is likely that some form of medical may be required. The medical is undertaken by a trained nurse and takes place at a time and place convenient for you which can include your own home.

  • Who is the beneficiary of a Key Man Policy?

    A key person insurance policy is taken out by a business as the owner of a the policy insuring an individual who is key to the future success of the company.

    Should the key individual die whilst insured the claim would be paid out to the company who is the beneficiary of the policy.

  • Is Key Person Insurance a business expense?

    If it is wholly and exclusively for the benefit of the business then usually the premiums are tax deductible but any claim would be treated as a trading receipt and be taxed accordingly.

    If the policy is for the benefit of a lender or shareholders then it will not meet this rule and it is unlikely the premiums will be tax-deductible.

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Compare Best UK Key Man Insurance Providers

aegon

Aegon

Aegon was founded as Scottish Equitable in 1831. Dutch insurer Aegon N.V. bought a 40% stake in Scottish Equitable in 1994 and became a 100% stakeholder in 1998.

  • Critical illnesses covered: 43
  • Plus partial payouts for 15 additional illnesses
AIG

AIG

AIG Life is the UK arm of US insurance giant American International Group Inc. The insurer got its foothold in the UK protection market when it acquired Ageas Protect in 2014.

  • Critical illnesses covered: 43
  • Plus partial payouts for 5 additional illnesses
aviva

Aviva

Aviva was formed out of the Norwich Union-CGU PLC merger in 2000, but the company can trace its roots back to the 17th century.

  • Critical illnesses covered: 41
  • Plus partial payouts for 10 additional illnesses
legal & general

Legal & General

Legal & General was founded in 1836 and has since grown to become an international provider of insurance, pension and investment products.

  • Critical illnesses covered: 39
  • Plus partial payouts for 2 additional illnesses
liverpool victoria

Liverpool Victoria

Liverpool Victoria has traded as LV= since May 2007. It is one of the largest insurers in the UK with more than 5 million customers across the country.

  • Critical illnesses covered: 44
  • Plus partial payouts for 20 additional illnesses
royal london

Royal London

Royal London began as a friendly society in 1861, later changing to a mutual society in 1908. Today, Royal London is now the UK’s largest mutual life, pensions and investment company.

  • Critical illnesses covered: 46
  • Plus partial payouts for 14 additional illnesses
scottish widows

Scottish Widows

Scottish Widows dates all the way to 1812 with an original remit of setting up a general fund to protect the assets of widows and the female relatives of fund-holders. In 2000, Scottish Widows demutualised and became part of the Lloyds TSB Group and in 2009 became part of the Lloyds Banking Group.

  • Critical illnesses covered: 49
  • Plus partial payouts for 8 additional illnesses
vitality

Vitality

Vitality is owned by South African insurer Discovery Holdings. Discovery entered the UK market in 2007 via a joint venture with PruHealth and PruProtect, part of the Prudential Group.

  • Serious illnesses covered: Up to 174
zurich

Zurich

Zurich Insurance Group is one of the world’s largest insurers and operates across the globe, with locations in more than 170 countries worldwide. Zurich has 60,000 employees, including around 11,000 in the UK.

  • Critical illnesses covered: 40
  • Plus partial payouts for 2 additional illnesses

Get Keyman Insurance Quotes & Expert Advice

Setting up this cover can become quite complicated when taking into account the level of cover and tax position. For help and advice, please do not hesitate to pop us a call on 02074425880 or email us at help@drewberry.co.uk.

Why Speak to Us…

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.

  • There is no fee for our service
  • We are independent and impartial
    Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
  • We’ve got bargaining power on our side
    This allows us to negotiate better premiums for you than you going direct yourself.
  • You’ll speak to a dedicated expert from start to finish
    You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
  • Benefit from our 5-star service
    We pride ourselves on providing a 5-star service, as can be seen from our 2748 and growing independent client reviews rating us at 4.92 / 5.
  • Gain the protection of regulated advice
    You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
  • Claims support when you need it the most
    You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.

Great service assisting me obtain the right product. Would happily recommend Drewberry following their professional and efficient way of working.

Jonathan Chadwick
08/06/2020
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