What Is Keyman Insurance? How Much Does It Cost?

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16-11-2020

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:

  • Life Insurance only
    Pays a cash lump sum to the business if a key person dies or becomes terminally ill (diagnosed with less than 12 months to live).
  • Life & Critical Illness Cover
    Adding Critical Illness Cover protects the business should key employees suffer a serious illness such as cancer, heart attack or stroke.

UK guide to keyman insurance
In this guide, we’ll discuss:

  • Whether you need Keyman Insurance
  • How much it costs
  • How HMRC taxes it
  • The best UK providers

You will also be able to compare instant online quotes from the top UK insurers 😎

What Does Key Person Insurance Cover?

Businesses use the payout from a policy for a variety of purposes, for example:

  • Providing a buffer against loss of profits.
  • Paying for recruitment and training to replace the key member of staff.
  • Repaying outstanding loans.
  • Making up for loss of important personal or business contacts.
  • Assisting with loss of confidence from suppliers and customers.
  • Easing difficulties in raising finance for new developments.
  • Making up for loss of detailed knowledge of the business’ processes and systems.
  • Winding down the company in an orderly fashion.

Who Needs Keyman Insurance?

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.

What’s The Risk Of Dying?

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

What’s The Risk Of Becoming Critically Ill?

Approximately 4 in 5 Critical Illness claims are made up of cancer, heart attacks and strokes.

  • Around 25% of new cancer cases diagnosed every year are in people aged under 60 (Cancer Research UK).
  • 50% of people born after 1960 will be diagnosed with cancer at some point.
  • Nearly 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). Almost half of these are under the age of 75. (British Heart Foundation).

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.

How Much Does Keyman Insurance Cost?

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:

  • Amount of cover
  • Length of cover
  • Including critical illness insurance.

Others are personal factors that you have less control over, for example:

  • Age
  • Current state of health
  • Smoker status
  • Lifestyle and hazardous activities
  • Family history.

Average Cost Of Key Person Insurance

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
These key person insurance quotes were calculated on February 8th, 2020

Use our Keyman Insurance calculator to compare instant online quotes from the UK’s leading insurers including AIG, Aviva and Legal & General 🧐.

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How to Value Your Business for Insurance Purposes

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.

How Is It Taxed By HMRC?

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.

Protecting Shareholders

  • Premiums are rarely eligible for corporation tax relief as the plan benefits someone other than the business.
  • Meanwhile, a key person claim on plans that cover shareholders usually count as a trading receipt, which means HMRC will also tax the payout.

Covering Employees

  • HMRC usually regard such insurance policies as a benefit for the business. Premiums are therefore generally tax deductible.
  • However, the benefit still counts as a trading receipt (so HMRC will tax a payout).

Protecting Business Loans

  • HMRC regards a keyman insurance policy on a business loan as a benefit for the lender, not the business. The business therefore cannot deduct premiums against corporation tax.
  • However, as the payout from the policy is intended to rebalance the company’s capital account, HMRC does not generally class it as a trading receipt. Subsequently, it’s not typically liable to any tax.

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.

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Common Business Insurance Questions

  • Should I Write Keyman Cover Into Trust?

  • How Long Should The Insurance Last?

    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.

  • Should We Include Critical Illness Cover?

    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.

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Who Are The Best UK Keyman Insurance Providers?

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:

  • AEGON
  • AIG
  • Aviva
  • Legal & General
  • Liverpool Victoria
  • Royal London
  • Scottish Widows
  • Vitality
  • Zurich

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.

Additional Benefits

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:

  • 24 / 7 Virtual GP Service
  • Physiotherapy Sessions
  • Counselling & Stress Helpline
  • High street discounts and rewards for healthy living

Other Types of Business Protection

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:

  • Shareholder Protection
    An insurance policy which provides the funds for surviving shareholder(s) to repurchase the shares of a deceased shareholder. This provides the ability for the remaining shareholder(s) to subsequently retain control of the company if a shareholder exits the business through death or critical illness.
  • Business Loan Protection
    Designed specifically to repay outstanding corporate debt such as company overdrafts, commercial loans, venture capital funding and commercial mortgages. While not all lenders will demand Business Loan Insurance, many prefer companies to have it in place.
  • Relevant Life Insurance
    Another company-paid Life Insurance. However, rather than benefiting the business, the payout goes to the insured’s family. Relevant Life Cover is incredibly tax-efficient thanks to various tax reliefs on premiums and the payout. Read more on the differences between Key Man Insurance and Relevant Life Cover here.

Should We Do It Ourselves Or Get Independent Advice?

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:

  • Are you protecting shareholders, employees or a business loan?
    This will impact how HMRC taxes your insurance premiums and benefits.
  • Which insurer is right for you?
    Certain insurers have higher limits than others, while some insurers have better additional benefits.
  • Do you have pre-existing medical conditions?
    These could make it slightly more difficult to get cover with some insurers, which may place a loading on your premiums.
  • How long will the key person be vital to the business for?
    You don’t want to extend the cover beyond an individual’s likely status as key to the ongoing success of the company.
  • How much cover do you need?
    This will depend on the size of your business, your profit margin, a key individual’s contribution to the success of the company and many more factors.

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.

Meet Our Keyman Clients

Find out why these companies chose Drewberry to help with their keyman insurance needs.

  • Bikmo
    A fintech Bicycle Insurer who chose to cover their Founder and CTO.
  • Applegate
    An eProcurement Platform with global expansion plans needed to protect their CEO.
  • Adworks
    A digital agency wanting key person insurance to protect their CEO.

Compare Keyman Insurance Quotes & Get Expert Advice

Setting up Keyman Insurance can become quite complicated. This is especially the case when taking into account the level of cover you need and the tax position.

Why Speak to Us?

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 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.

Kim S
22/06/2020
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