Keyman Insurance

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02-03-2021

Keyman Insurance — or Key Person Insurance — is a form of Life Insurance that 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.

In this expert guide, we’ll discuss:

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

If at any point you want to compare pricing we have built a handy tool 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.

Any business owner knows how difficult it is to hire star employees and the impact it would have should something happen to them.

Keyman Insurance certainly won’t replace the business owner or star employee but it will help support your company financially should something happen.

You can read here why our client Bikmo (start-up bicycle insurer) took out Key Person cover for their founder and CTO.

Other more established businesses have chosen to cover their MD, as was the case with advertising agency Adworks.

What About Relevant Life Insurance or Income Protection?

It is important to recognise that Keyman Insurance pays out a lump sum for the benefit of the business and not the individual who has died or suffered a critical illness.

  • A Relevant Life Insurance policy is more appropriate if you are a company director who wants a cash lump sum to be paid to your family if you were to die.
  • Executive Income Protection is more appropriate if you are a business owner who wants to protect a proportion of your monthly income if you are unable to work due to illness or injury.

Why Is Keyman Insurance So Important?

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:

Risk of Death in 10 Years

35 Years Old

1 in 62

45 Years Old

1 in 29

55 Years Old

1 in 12

Life Expectancy CalculatorA bit morbid we know, but this tool works out the risk of you passing away based on ONS Life Expectancy Data
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How to Value Your Business for Insurance Purposes

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 define 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.

Valuing 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.

The value of your Keyman Insurance policy will depend on your business and the people you’re insuring, which is why it’s always best to get expert advice.

If you need help we provide independent fee-free advice. You can speak to one of our expert advisers on 02074425880 or email help@drewberry.co.uk.

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 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

  • Who Owns The Policy And Can This Be Changed?

    The policy is owned and paid for by the limited company or limited liability partnership.

    There are 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 to make such change you will need to consult your solicitor.

  • Who Is The Beneficiary Of A Key Man Policy?

    A key person insurance policy is taken out by a business as the owner of a the policy insuring an individual who is key to the future success of the company.

    Should the key individual die whilst insured the claim would be paid out to the company who is the beneficiary of the policy.

  • 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.

  • 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 I Write Keyman Cover Into Trust?

  • 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 but 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.

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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

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 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.

Kim S
22/06/2020
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