Q: Can we opt for an income instead of 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 person is too ill or injured to work.

Question 1

How much cover do we need?

Accepted Answer

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.

Valuing a Business for Key Man Insurance

One broad rule of thumb is that a key person 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 Keyman Insurance policy will depend on your business and the people you’re insuring, which is why it’s always best to get expert advice.

Question 2

Do we need to include critical illness cover?

Accepted Answer

For business continuity purposes, the best policies will include Critical Illness Insurance alongside a basic Key Man Life Insurance 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 person 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.

The average age of a claimant on Legal & General’s Critical Illness policies in 2017 was 47.

Question 3

How long should key man insurance last?

Accepted Answer

When setting up your Keyman Insurance 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 person’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 Man Insurance cover, 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 Person Insurance policies are set-up for between 5 and 10 years and are then reviewed at the end of the term.

Question 4

Can we opt for an income instead of a lump sum payout?

Accepted Answer

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 person is too ill or injured to work.

Question 5

Who owns the policy and can this be changed?

Accepted Answer

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.

Question 6

Will a key person need a medical?

Accepted Answer

This is dependent on the age of the key person and the level of cover that is required. The older the key person 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.

Question 7

Who is the beneficiary of a key man policy?

Accepted Answer

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.

Question 8

Is key person insurance a business expense?

Accepted Answer

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.

Age	5 Year Policy	10 Year Policy	15 Year Policy
Cost of Key Man Life Insurance
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 Key Man Life & 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

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What is Keyman Insurance and how does it work?

What Does Key Person Insurance Cover?

Who Needs Keyman Insurance?

Why Key Man Insurance is so important for small businesses…

What’s the Risk of Passing Away?

What’s the Risk of Becoming Critically Ill?

How Much Does Key Man Insurance Cost?

Average Cost of Key Man Insurance Policy

How is Keyman Insurance Taxed?

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