This Guide
- What is it?
- What Does it Cover?
- Do We Need it?
- How Much Cover Do We Need?
- Why Add Critical Illness Cover?
- Cost and Taxation
- Compare Top 7 Insurers
- Expert Advice
Written by:
Michael Englefield
Content Manager at Drewberry
What is Keyman Insurance?
The definition of Key Person Insurance is a business protection product that covers your company against the loss of a key member of staff. This might be the business owner, founder or an employee your company simply can’t do without.
Most companies have at least one key person 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.
The purpose of Keyman Insurance is to cover the life and health of that person or group of people to offer a financial lifeline in the form of a cash injection to the company should the worst happen.
Victoria Slade
Business Protection Expert at Drewberry
Neil
Pensions Advice
Robert
Income Protection
What Does Keyman Insurance Cover?
The purpose of Key Man Insurance is to cover a business against the numerous risks that can arise with the sudden death or serious illness of a key team member.
You have two main options with it comes to key employee coverage:
- Key Man Life Insurance – covers a key staff member in the event that they pass away or become terminally ill
- Key Man Critical Illness Cover – protects a key member of staff should they suffer one of the critical illnesses specified in the policy’s terms such as heart attack, cancer or stroke.
The payout from your policy can be used however the business sees fit. One common use for payouts is meeting recruitment and training costs for a replacement. Other losses you can protect against include:
- Loss of important personal or business contacts
- Difficulties in meeting existing loan repayments
- Loss of confidence from suppliers and customers
- Difficulties in raising finance for new developments
- Loss of detailed knowledge of the business’ processes and systems
- Having to repay a loan the key person has made to the business
- Loss of goodwill.
In circumstances where there is only one key person and there is no business without them, the cash could be used to wind down the company in an orderly fashion. This could alleviate any concerns for the bereaved family relating to their deceased loved one’s business affairs. Winding down the business could include paying off creditors and perhaps providing severance pay to any staff.
When a company relies heavily on a key individual or individuals, it’s vital to make sure the business can cope financially in the event of their sudden absence. Key Man Life Insurance protects against the death of a key individual, while Key Man Critical Illness Cover adds payouts for certain specified serious illnesses.
We’re very familiar with the idea of insuring our own lives to leave something for our dependants, but less used to insuring our lives to protect our business interests. This is despite many entrepreneurs seeing the company they are building up as their baby!
Rob Harvey
Independent Protection Expert at Drewberry
With a Keyman Insurance policy covering the business, company owners can rest easier knowing they are protected should the worst happen.
Excellent service at convenient times of the day specified by me. All product options were clearly outlined and I am very pleased.
Do We Need Key Person Insurance?
When recently polled by leading insurer Legal & General…
46% of businesses admitted they’d fold immediately if one of their key people died or suffered a critical illness. How would your company cope?
If your business relies largely on the input of a one key person or a small selection of key people, then you have to think about how your company would cope without them.
Many businesses simply have no plan in place should the worst happen, which is why such a large number of companies would fold almost immediately on the loss of a key employee.
Why Keyman Insurance is So Important for Small Businesses…
According to the Office for National Statistics, over 90% of companies registered in the UK in 2016 employ fewer than 5 people.
The vast majority of UK companies are small, and small companies are particularly vulnerable to the loss of one or two key members of staff.
Without them, there could be issues securing investment, maintaining lines of credit or even simply with keeping the company going.
Businesses of all sizes should consider Key Person Insurance if they have an individual or group of individuals that they could not do without, but small companies feel such losses particularly acutely.
The real value in any small business is the people who run it, the ones with the vision, direction and expertise to make it a successful enterprise. Without these people a company can quickly falter.
It’s no surprise that lenders and investors are therefore increasingly demanding Key Person Life Insurance with Critical Illness Cover is in place to protect their interests before stumping up any cash.
Victoria Slade
Business Protection Adviser at Drewberry
Key Person Insurance Case Studies
How Much Key Man 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 employee 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 drive the sums assured for Keyman Cover.
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 do you value a business for Keyman 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. It will depend on your business and the people you’re insuring, which is why it’s always best to get expert advice.
A lot of the companies we speak to seriously underestimate the level of Keyman Life Insurance they need and risk under-insuring their key people. Often, a good starting point is to calculate a key person’s contribution to gross profits – although this can still be too low for some start-ups.
You also need to make sure you’ve covered any business debts such as loans, overdrafts or directors’ loans. These can be like landmines for a business that suddenly loses a key director.
Samantha Haffenden-Angear
Independent Protection Expert at Drewberry
Should I include Keyman Critical Illness Cover?
For business continuity purposes, the best policies will include Critical Illness Protection alongside the Key Man Life Cover. This is because a critical illness is far more likely than a sudden death.
The long-term loss of a crucial employee through illness could exert a financial strain on the company and lead to uncertainty. You might need to hire and train an interim replacement, for instance.
The capital injection provided by Keyman Critical Illness Cover 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 Aviva’s Critical Illness policies in 2015 was 45, down from 46 in 2014.
By choosing both types of cover, the policy will pay out not just in the event of death, but also if the insured is diagnosed with a disease such as cancer, multiple sclerosis (MS) or Parkinson’s, or if they suffer a heart attack or stroke. This gives the insured individual the peace of mind that their company can cope without them so they can focus on recovery.
How Long Should Keyman Protection Last?
When setting up your policy you will need to decide how long you would like it to run. 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 and 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 Keyman Insurance, you can get cover for longer periods.
Think carefully if you’re considering taking out very long-term cover, though. 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, so it may not make sense to lock yourself into a policy over the very long-term.
How Much Does Keyman Insurance Cost?
Like any Life Insurance policy, the cost of your Key Person Insurance will be dictated by factors such as the level of benefit to be insured and the age of the key person being covered. There are a number of other factors to consider when you’re looking at how much it will cost, such as the insured’s state of health and whether or not they smoke.
As the premiums are based on such a wide variety of factors, you’re best completing our Keyman Insurance quote form online. From there, we’ll be able to provide you with formal pricing based on your specific circumstances.
How is Key Man Insurance Taxed?
The tax treatment of Keyman Insurance will be dictated by the purpose of the plan and, ultimately, who is to receive the benefits. HMRC’s Key Man Insurance rules can seem complicated. How the policies and benefits are taxed can appear quite arbitrary depending on how they’re going to be used.
We strongly recommend discussing your specific situation with your accountant but details below set out the general consensus on how it is taxed.
Keyman Insurance for 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 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.
Key Person Insurance 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.
Keyman Insurance protecting business loans…
Key Person Insurance policies to protect a business loan are taxed differently still. 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 classed as a trading receipt and so isn’t liable to any tax. This means that there’s no need to gross up such policies, which naturally reduces the premium.
Best Keyman Insurance Providers 2018
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AegonAegon 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.
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AIGAIG 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.
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AvivaAviva was formed out of the Norwich Union-CGU PLC merger in 2000, but the company can trace its roots back to the 17th century. Aviva Key Man Insurance forms part of its Business Life Insurance Options policy.
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Legal & GeneralLegal & General was founded in 1836 and has since grown to become an international provider of insurance, pension and investment products.
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Liverpool VictoriaLiverpool 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.
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Royal LondonRoyal 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.
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VitalityVitality 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.
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Getting Expert Keyman Insurance Advice
Given the complexities that arise when taking out cover we have built a keyman insurance calculator for our advisers to take you through over the phone to ensure you are taking out the correct type and level of cover.
Unlike accountancy and legal fees and the other costs associated with running a growing business, at Drewberry we don’t charge you a fee for our planning expertise. Instead, we get a finder’s fee from insurance provider when we place business with them.
Our advisers help companies throughout the UK make sure they have suitable key person cover everyday, we are here to help so please do no hesitate to pop us a call on 02084327333.
Not only can an independent adviser access the whole market to ensure that clients obtain the most competitive keyman insurance quotes but we also take care of the whole application process from start to finish.
Given there is no fee for this service and the premiums are the same as if you went directly to an insurer, using an adviser is a bit of a no-brainer.
Sam Barr-Worsfold
Independent Protection Expert at Drewberry
