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 UK insurers
- Get expert advice
8 August 2018
What is Keyman Insurance?
The definition of Key Person Insurance is a business protection product that covers your company against the loss of a vital employee. 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.
I help businesses every day ensure they have a financial lifeline in place in the form of a cash injection should the worst happen to one of their key people.
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 worker.
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 Insurance – protects a key member of staff should they suffer one of the serious 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.
With a Keyman Insurance policy covering the business, company owners can rest easier knowing they are protected should the worst happen to a key staff member.
When a company relies heavily on a key worker or workers, it’s vital to make sure the business can cope financially in the event of their sudden absence.
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!
Robert Harvey, Cert CII
Business Protection Expert at Drewberry
Victoria swiftly helped in finding a solution which offered the required cover, with a more competitive premium.
Do We Need Key Person Insurance?
When recently polled by leading insurer Legal & General…
53% 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, around 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 a key worker or group of key workers 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 keyman insurance is in place to protect their interests before stumping up any cash. If you have key people to protect then please don’t hesitate to pop us a call on 📞 02074425880 to talk through with one of our expert advisers.
Victoria Slade
Business Protection Expert at Drewberry
Business Protection Client Stories
How Much Key Man Insurance 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 drive 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 do you value 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. 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 cover they need and risk under-insuring their key people.
Often, a good starting point is to calculate a key individual’s contribution to gross profits. In addition you will also want to make sure you’ve covered any business debts such as loans, overdrafts or directors’ loans.
Samantha Haffenden-Angear, Cert CII
Independent Protection Expert at Drewberry
Should I include Critical Illness Cover?
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. You might need to hire and train an interim replacement, for instance.
The capital injection provided should a key person suffer a life changing illness puts the mechanisms in place to ensure that a business can meet these costs while continuing to trade.
By choosing both life and critical illness 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 Key Person Insurance 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 take out a more expensive Key Man Insurance policy over the very long-term.
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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:
- Level of benefit to be insured
- The age of the key person being covered
- The insured’s state of health
- The insured’s smoker status.
As the premiums are based on such a wide variety of factors, you’re best using our online Key Man Insurance quote tool to compare the UK’s leading insurers and get some indicative quotes. From there, we’ll be able to provide you with formal pricing based on your specific circumstances.
How is Key Person Insurance Taxed?
The tax treatment of Key Person Insurance 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.
We strongly recommend discussing your specific situation with your accountant but details below set out the general consensus on how it is taxed.
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 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…
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.
Related Key Man Insurance Guides
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.
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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 expert 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 business protection experts 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 📞 02074425880.
Why Work With Drewberry™
- We placed over £1 billion worth of risk with insurers for our clients in 2017
- We were nominated for Protection Intermediary of the Year at the Protection Review Awards in 2016, 2017 and 2018 and the Cover Excellence Awards in 2016 and 2017
- Our ethos is to provide the best possible service demonstrated by the growing number of 5-star rated reviews with 98% of our clients saying they would recommend us
- Tom and the rest of our insurance experts are frequently quoted in leading papers such as The Independent and Financial Times with a reputation in the media as an authority in our industry.
Read more about Drewberry here >>
Not only can an independent adviser access the whole market to ensure that clients obtain the most 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 expert adviser is a bit of a no-brainer.
Sam Barr-Worsfold, DipFA
Independent Protection Expert at Drewberry
