In the vast majority of cases the answer is no, there’s no need for it to be placed into trust.
This is because a business pays for the benefit and the insurer pays the benefit back into the business in the event of a claim.
Keyman Insurance — or Key Person Insurance — financially protects your business by paying a cash lump sum if a key member of staff dies. This could be anyone who’s essential to the everyday running of the company. For example, the business owner, founder or an employee you simply can’t do without.
Key Person Protection comes in two forms:
In this guide, we’ll discuss:
You will also be able to compare instant online quotes from the top UK insurers 😎
Businesses use the payout from a policy for a variety of purposes, for example:
According to Legal & General’s most recent survey of SMEs, 52% of businesses would fold within a year due to the loss of a key person. Yet, despite this, Legal & General also found that half of businesses don’t have any protection against such a loss.
Unprotected businesses are therefore running the risk of severe disruption to business continuity should they lose any of their key people.
No one wants to consider it, but it’s a risk we should all take into account. According to ONS life expectancy data, the chances of a healthy male passing away within the next 10 years are as follows:
Try our Life Expectancy Calculator to work out your own risk 😵
Risk of Death in 10 Years | |
---|---|
35 Years Old | 1 in 62 |
45 Years Old | 1 in 29 |
55 Years Old | 1 in 12 |
Approximately 4 in 5 Critical Illness claims are made up of cancer, heart attacks and strokes.
IMPORTANT NOTICE 🧐
Not every incidence of the above conditions will be covered by Critical Illness Cover. Less severe incidences may not be included in your keyman insurance policy or may only trigger a partial payout. It’s essential you check definitions carefully or ask your adviser for assistance.
Some company directors opt for Executive Income Protection as a more comprehensive form of sickness insurance. It pays a monthly income should you be unable to work due to any illness or injury.
There are a number of factors that will determine the cost of keyman cover. Some of the key policy factors you can control, for instance:
Others are personal factors that you have less control over, for example:
We have calculated examples of the monthly cost of Keyman Insurance. In the table below, we split this 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
|
10 Year Policy
|
---|---|
Cost of Life Cover Only
|
|
Age 35
|
£7.10
|
Age 45
|
£12.66
|
Age 55
|
£26.78
|
Cost of Life and Critical Illness Cover
|
|
Age 35
|
£32.56
|
Age 45
|
£72.21
|
Age 55
|
£158.57
|
Use our Keyman Insurance calculator to compare instant online quotes from the UK’s leading insurers including AIG, Aviva and Legal & General 🧐.
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. Yet this said, it isn’t a fixed formula.
The value of your keyman insurance will depend on your business and the people you’re insuring — for this reason, we feel it’s always best to get expert advice.
Ultimately, how HMRC treats this insurance is dictated by the purpose of the plan and who will receive the benefits. The rules can be complicated and may appear quite arbitrary as they depend on how the company plans to use the policy.
Note that, if HMRC taxes the payout, you’ll need to gross up the benefit. This involves insuring yourself for a larger sum than you require so you’re left with the correct payout after HMRC has deducted tax from the benefit.
Your adviser will be happy to assist with this, taking all relevant taxes into account.
The details above lay out the general consensus on how HMRC taxes keyman insurance. However, we strongly recommend discussing your specific situation with your accountant and local inspectorate of taxes.
In the vast majority of cases the answer is no, there’s no need for it to be placed into trust.
This is because a business pays for the benefit and the insurer pays the benefit back into the business in the event of a claim.
Business requirements naturally change and evolve over time. As such, most keyman policies are set up to last for 5 – 10 years and are reviewed at the end of the term.
For business continuity, the best policies generally include Critical Illness Insurance alongside a Life-only policy.
This is because a key person is far more likely to suffer a serious illness such as a heart attack, cancer or a stroke than sudden death, which can have the same devastating impact on your business as them passing away.
We are an independent advisory firm which provides quotes from all of the leading UK Insurers. Below is a list of the main insurance providers we work with:
No two insurers are the same. For instance, some prefer certain types of risk more than others. This makes it really important to compare Keyman Insurance quotes from all the leading insurers when doing your research to find the best one for you.
The additional benefits insurers include alongside the core key person cover can vary significantly. For example, some providers offer extensive support services that can include any of the following:
While Keyman Insurance is one option to protect your business should an important individual within your company pass away, there are also other Business Protection Insurance options to consider:
It’s perfectly possible to set up keyman insurance yourself. However, this can be complicated and it may be difficult to decide the best way to go about it. For example, factors to consider include:
Choosing to go it alone means you’ll have to work through the above questions yourself. Furthermore, you’ll also need to ensure you’re setting the insurance policy up correctly so it doesn’t fall foul of any of HMRC’s rules.
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service 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 talk to us.
If you need help protecting a key person in your company give us a call on 02074425880 or email help@drewberry.co.uk.
The staff have been very knowledgeable and I have enjoyed working with Nadeem on setting up our plan.
Or call us on 0208 432 7333
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