Keyman Insurance — also known as Key Person Insurance — protects your business financially if you lose a key worker.
A key worker could be anyone who’s essential to the everyday running of the company. This might be the business owner, founder or an employee you simply can’t do without.
Keyman Insurance comes in two forms:
Life Insurance only
Should a key person die or become terminally ill (diagnosed with less than 12 months to live) the plan pays out a cash lump sum to the business.
Life & Critical Illness Cover
Adding Critical Illness Cover also enables the plan to pay out if a key person became critically ill, for example with a heart attack, cancer or stroke.
What Does Key Person Insurance Cover?
Keyman Insurance provides business continuity should a key person exit the business through death or critical illness. You can therefore use the payout for a variety of purposes, for example:
Providing a buffer against loss of profits.
Paying for recruitment and training of a replacement.
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.
Despite this, Legal & General also found that half of businesses don’t have any kind of protection against such a loss. These unprotected businesses are running the risk of severe disruption to business continuity.
78.2% had fewer than five staff and 89.5% had fewer than ten staff. Clearly, the vast majority of UK companies are small by employee numbers.
If this applies to your company, consider how you’d cope if you lost one of your key team members.
Small companies are particularly vulnerable to the loss of one or two key staff. Without them, there could be issues securing investment, maintaining lines of credit or even simply with keeping the company running.
Most companies have at least one key person whose absence 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.
This is especially true if the business is small, where there’s usually limited capacity for others to take the strain.
Josh Martin Business Protection Expert at Drewberry
What’s The Risk Of Dying?
It is not nice to think about but it is a risk we should be aware of. According to ONS life expectancy data, the chances of a healthy male passing away within the next 10 years are as follows.
Approximately 4 in 5 claims on Critical Illness Insurance policies are made up of the ‘big three’ illnesses: cancer, heart attacks and strokes.
Around 1 in 4 new cancer cases diagnosed every year are among people aged under 60 (Cancer Research UK).
50% of people born after 1960 will be diagnosed with cancer at some point in their lifetime.
Almost 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 one of the above conditions will be covered by Critical Illness Cover. Less severe incidences may not be included in your policy or may only trigger a partial payout. It’s essential you check definitions carefully or ask your adviser for assistance.
Can We Get Key Person Insurance?
Most businesses can take out Key Man Insurance on key employees.
Employees must be within the minimum and maximum ages an insurer is willing to insure. This is typically between the ages of 18-75, although it varies by insurer. However, some insurers may consider insuring an individual who’s older than this for a life-only policy.
Availability of Key Person Insurance is governed by tax precedent laid out in the Anderson Rules.
These state that the policy must not extend beyond an employee’s usefulness to the company (or how long that worker will be ‘key’ to the business for).
The Anderson Rules also lay out the tax position of premiums and payouts, which varies depending on the nature of the risk insured.
A Key Person policy covering loss of profits is, for instance, generally considered a business expense. On the other hand, one covering corporate debt tends not to be.
How Much Does Key Man Insurance Cost?
There are a number of factors that will determine the cost of cover. Some of the key policy factors you can control, such as:
Level of cover
The more cover you require the higher the cost of the policy.
Length of cover
The longer the policy term the higher the risk of needing to claim. This is reflected in higher premiums.
Including critical illness insurance
As the risk of suffering a critical illness such as heart attack, cancer or stroke is far higher than dying you can expect higher premiums.
Others are personal factors that you have less control over, for example:
Age
The older we are, the greater the risk of passing away during the term of the policy.
Current state of health
Those with health conditions, especially those which might limit life expectancy, will typically pay more for Key Person Insurance to reflect the greater risk the insurer is taking on.
Smoker status
If the key individual smokes, they are at greater risk of developing a serious, fatal health condition and so insurers charge more.
Lifestyle and hazardous activities
Lifestyle habits, for example regularly drinking more alcohol than is recommended, or participating in hazardous activities, could result in an insurer increasing the cost of the cover.
Family history
Has any of the key individual’s immediate family ever suffered a serious and / or hereditary illness that could impact on them? If so, the premiums may be increased to reflect this.
Average Cost Of A Key Man Insurance Policy
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 quotes were calculated on February 8th, 2020
How HMRC taxes a policy and its benefit can appear quite arbitrary depending on how the company plans to use the policy.
Protecting Shareholders
If a plan benefits anyone other than the business — for example a lender or the company’s shareholders then it won’t be ‘wholly and exclusively’ for the benefit of the business. For this reason, it’s unlikely that the premiums will be 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.
Covering Employees
Policies that cover employees are usually regarded as a benefit of the business, in which case the premiums are generally tax deductible.
However, the benefit still counts as a trading receipt (so HMRC will tax them). This means that you’ll need to gross up the sum assured so there is an appropriate level of cover to protect the business.
Protecting Business Loans
Where a policy is to protect a business loan which benefits the lender, 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 generally classed as a trading receipt. As such, it’s not typically liable to any tax.
IMPORTANT NOTICE
The details above lay out the general consensus on how HMRC taxes Key Person Insurance. However, we strongly recommend discussing your specific situation with your accountant and local inspectorate of taxes.
Meet Our Key Man Insurance Clients
Bikmo / Fintech Bicycle Insurer
We started to look at key person insurance when our board suggested it was time to protect the business properly. If myself or our chief technology officer Jorj died, it could be a potentially fatal setback for the business.
Bikmo founder and CEO David George
Applegate / eProcurement Platform
It became clear that my death could potentially derail the company’s progress. In turn, threatening the livelihoods of everyone who works at Applegate.
The idea was to put a sufficient sum in place to fund the cost of a replacement.
Applegate CEO Stuart Brocklehurst
Adworks / Digital Agency
If we were to lose Daniel’s leadership and business acumen the company could face real hardship.
We came across Drewberry when we were researching a new key person policy for Daniel. They stood out thanks to the excellent client reviews on their site.
AdWorks CEO Daniel Knox
Who Are The Best UK Key Man Insurance Providers?
We are an independent advisory firm who provide key person insurance quotes from all of the leading UK Insurers. Below is a list of the main insurers we work with:
AEGON
AIG
Aviva
Legal & General
Liverpool Victoria
Royal London
Scottish Widows
Vitality
Zurich
No two insurers are the same with some preferring certain types of risk more than others. This makes it really important to compare quotes from all the leading insurers when doing your research.
Additional Keyman Insurance Benefits
The additional benefits that are included alongside the core cover can vary significantly. Some providers offer extensive support services that can include:
24 / 7 Virtual GP Service
Physiotherapy Sessions
Counselling & Stress Helpline
High street discounts and rewards for healthy living
Should We Do It Ourselves Or Use An Independent Adviser?
It’s possible to set up Key Person Insurance yourself.
However, this can be complicated. It may be difficult to decide the best way to set up Keyman Insurance. For example, factors to consider include:
Are you protecting shareholders, employees or a business loan?
This will impact how HMRC taxes Key Man Insurance premiums and benefits.
Which insurer is right for you? Certain insurers have higher limits than others, while some insurers have better additional benefits that you might benefit from.
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 individual be key to the business for? You ideally don’t want to extend cover beyond an individual’s likely status as key to the ongoing success of the company.
How much Keyman Insurance 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.
Getting Fee-Free Keyman Insurance Advice
Choosing to go it alone means you’ll have to work through the above questions yourself. You’ll also need to ensure you’re setting the policy up correctly so it doesn’t fall foul of any of HMRC’s rules.
If it’s all getting a bit confusing, why not ask an expert?
We know the business protection market inside out, including all the different insurers, so are well-placed to point you in the right direction. Simply drop us a call on 02074425880 for help and fee-free advice today.
Consulting an expert at Drewberry enables you to get competitive quotes from across the market without having to lift a finger.
Other Types of Business Protection
Keyman Insurance is one option to protect your business should an important individual within your company pass away. However, there are also other Business Protection Insurance options to consider. For example:
It can work alongside Keyman Insurance to ensure a business is fully protected should an important shareholder die or become critically ill.
Should a shareholder die, their shares typically pass to their family. This could have major implications for the future success of the business if the family has no aptitude for running the business but is entitled, thanks to their inherited shareholding, to a proportion of the profits.
Shareholder Protection prevents such a situation for the business, as well as ensuring a deceased shareholder’s loved ones are properly compensated for their inherited shares.
Although not a legal requirement many business lenders and venture capital firms are starting to insist on having some means to repay a loan should a key person die or become seriously ill.
Personal Protection With Relevant Life Insurance
Relevant Life Insurance is another form of company-paid Life Insurance. However, rather than benefiting the business, it benefits the insured individual’s family.
Thanks to the trust set up at the time you buy the policy, there’s no inheritance tax or corporation tax issues on the payout. This is because the money doesn’t go into the deceased’s estate or back into the business in the event of a claim.
Ultimately, this will depend on your business, the key individual(s) you’re seeking to insure and a variety of other factors.
However, we’re finding increasingly it’s external investors or lenders that help define the level of cover businesses require.
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.
How to Value Your Business for Insurance Purposes
One broad rule of thumb is that key individuals 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 policy will depend on your business and the people you’re insuring, which is why it’s always best to get expert advice.
Should We Add Keyman Critical Illness Cover?
For business continuity, the best policies generally include Critical Illness Insurance alongside a Life-only policy.
This is because suffering a serious illness such as a heart attack, cancer or a stroke is more likely than sudden death but can nonetheless 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 individual suffer a life-changing illness, the capital injection a Keyman Insurance policy offers allows the business to meet any unexpected costs while continuing to trade.
How Long Should Key Person Insurance Last?
Business requirements naturally change and evolve over time. As such, most key man policies are set up to last for 5 – 10 years and are reviewed at the end of the term.
What About Keyman Business Income Protection?
Although less common, there are some insurers who provide a Key Person Income Protection policy. Here the business receives regular monthly payments should the key person suffer a serious illness or die rather than a lump sum.
Discuss with your adviser whether this is appropriate for your circumstances.
Who Owns A Key Man Insurance Policy And Can I Change This?
Key Man Insurance is typically owned and paid for by a limited company or limited liability partnership.
There may be 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, this can be tricky. To make such change you will need to consult your solicitor for the appropriate legal advice.
Will The Key Person Need A Medical?
This is dependent on the age of the key individual and the level of cover that’s you require. The older the insured or the more cover they need, the more likely the insurer is to request their GP notes and / or a medical assessment.
If you anticipate needing more than £500,000 of cover then it is likely that some form of medical may be required. A trained nurse will undertake the medical. It will take place at a time and place convenient for you, which can include your own home.
Who Is The Beneficiary Of A Key Man Insurance Policy?
The business is the beneficiary of a policy. Should the key individual die while insured, the insurer pays the claim to the company.
Is Key Person Insurance A Business Expense?
If it is ‘wholly and exclusively’ for the benefit of the business then usually the premiums are tax deductible. However, 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.
Check with your accountant and your local inspectorate of taxes for further guidance on how HMRC taxes Keyman Insurance.
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. Essentially, the policy is business-owned and for the business. For this reason you don’t usually require a trust.
Online Keyman Insurance Quotes & Expert Advice
Setting up this cover can become quite complicated. This is especially the case when taking into account the level of cover you need and the tax position. That’s where the team at Drewberry come in.
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:
There is no fee for our service.
We are independent and work with all the leading UK insurers.
You’ll speak to a dedicated expert from start to finish.
1You Come FirstWe are a client focused business who always aim to put you first.
2We are ExpertsTo provide you with the best advice, we need to know our stuff!
3We are HumanWe are real people with feelings who are here to help you.
4We are ProfessionalProviding a 5-star service requires a professional approach to everything we do.
5We are here to EducateWe don't believe in sales, we are here to educate so you can make informed decisions.
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