How Does HMRC Tax Key Person Insurance?

How HMRC taxes Keyman Insurance premiums revolves largely around guidance that’s more than 70 years old known as the ‘wholly and exclusively test’. The rule considers if the payout will be ‘wholly and exclusively for the purposes of the company’s trade’, i.e. just for the benefit of the business. If so, premiums are typically a tax-deductible business expense against your corporation tax bill. If the policy fails this test, the company may have to pay tax on premiums. What this means in practice is that, providing the payout is for the benefit of the company, premiums are usually tax-deductible. However, where the payout benefits shareholders, such as if the key person is a director whose death would significantly affect the company’s share price, HMRC might consider the policy as for the non-trade purpose of protecting the value of the director’s shares and therefore the value of their estate. Tax on the Payout As for the payout, it’s HMRC usually considers this a taxable trading receipt. You must therefore gross up the benefit so the company gets the correct amount after tax. One exception to this is generally where the payout is purely to repay a business loan. In this case, HMRC often sees it as a rebalancing of the company’s capital account and therefore doesn’t tax the benefit.

Do We Need To Put The Policy In Trust?

Generally speaking no, there’s no need to write Keyman Insurance into trust . This is because the business pays the premiums and gets the benefit if a key person dies or becomes critically ill. Setting up the policy in trust could actually delay the business getting the money when it needs it the most, so we don’t usually recommended it.

How Much Does Keyman Insurance Cost in 2021?

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02-03-2021

Keyman Insurance is an insurance policy that protects your business by paying a cash lump sum if a key employee dies.

The company can use the cash lump sum benefit however you see fit to get through the loss of that key individual. It might, for example:

Use it as a buffer against loss of profits
Pay for recruitment / training to replace the key employee
Repay outstanding loans
Make up for the loss of important personal / business contacts
Help reduce loss of confidence from suppliers and customers
Ease difficulties in raising finance for new developments
Wind down the company in an orderly fashion.

You can cover anyone who’s key to the success of the business, for example the owner(s) / founder(s), an essential salesperson or any other worker you simply couldn’t do without.

Cycling insurance tech startup Bikmo needed Keyman Insurance to cover founder David George and Chief Technology Officer Jorge Ives. Read their story here ⟶

Covering Serious Illnesses Will Increase The Cost

You can add Critical Illness Insurance to your policy. This pays out if a key person leaves the company due to a critical illness (for instance cancer, heart attack or stroke) as well as if they die.

Adding Critical Illness Cover increases the cost of Keyman Insurance. However, this is just because you’re considerably more likely to get a critical illness than you are to die. Higher premiums simply reflect the bigger risk to the insurer.

Given the higher risk of serious illness / injury, many of our Keyman Insurance clients extend their plan with Critical Illness Cover.

How Much Does Keyman Insurance Cost In 2021?

Insurers calculate the cost of Keyman Insurance based on both personal factors relating to the individual(s) insured as well as policy factors, such as the amount of cover you need.

Personal Factors

Age

The older you are, the higher the cost of Keyman Insurance premiums. This is because you are more likely to pass away or suffer a critical illness during the policy term the older you are.

Smoker Status

Smokers pay more than non-smokers for most insurance cover as they tend to die earlier than non-smokers. Moreover, they’re more likely to become ill — and seriously ill — than non-smokers, further bumping up the price of Keyman Insurance.

General State of Health

Insurers consider your health and pre-existing conditions when pricing Keyman Insurance. You might therefore pay higher premiums for the Life Insurance part of a policy if you have high blood pressure, for example.

With Critical Illness Cover, if you’ve suffered a condition such as cancer, the insurer might place an exclusion on paying out for that type of cancer if it comes back rather than upping premiums.

Hazardous Hobbies / Activities

Keyman Insurance costs more for those who regularly do hazardous activities due to the heightened risk of death / injury associated with them.

Such risky hobbies generally include skydiving, outdoor rock climbing, motocross, deep sea diving / caving / wreck exploration etc.

Policy Factors

As for policy factors, the biggest influence on the cost of Key Person Insurance is first and foremost the size of your benefit. The more cover you need, the higher your premiums.

Other important policy factors that impact the price of cover include:

Policy Length

The longer you think a key person will be key to the business and therefore need cover, the higher your premiums.

This is because the policy will cover the key individual to an older age, meaning there’s therefore a bigger chance of death / critical illness during the policy term.

Adding Critical Illness Insurance

Adding Critical Illness Cover increases the cost of premiums considerably. However, it means the company gets a payout if a key person develops one of several relatively common illnesses (e.g. cancer, heart attacks and strokes), as well as if they die.

Critical illnesses are considerably more likely than death. For example, half of everyone in the UK born after 1960 will get cancer at some point in their life according to Cancer Research UK. Meanwhile, the British Heart Foundation reveals someone has a stroke in the UK every 5 minutes.

Average Monthly Keyman Insurance Premiums

Given insurers look at so many factors when calculating the cost of Keyman Insurance, it’s not always east to pin down what your premiums will be.

However, the table below offers a rough guideline using premiums from our instant online quote engine. To get these figures, we’ve made various assumptions about each key person. For example, we’ve assumed they’re:

A healthy non-smoker
A company director with office-based duties
Seeking £150,000 of Life Insurance or £150,000 of combined Life Insurance and Critical Illness Cover
Wanting level cover that won’t reduce in value over the policy term
Looking for protection over the next 10 years.

Age	Monthly Premiums
Life Insurance Only
35 Years Old	£7.10
45 Years Old	£12.66
55 Years Old	£26.78
Life Insurance & Critical Illness Cover
35 Years Old	£32.56
45 Years Old	£72.21
55 Years Old	£158.57

How Much Key Person Insurance Do You Need?

This is a tricky question. After all, no two companies and no two key people are the same.

How exactly do you value a key person’s contribution to your company? This can be especially difficult if you’re a young company that’s growing fast.

Moreover, for many businesses, it may be hard to put a monetary value on a key person’s role until you’re suddenly facing life without them.

When considering the level of cover it is important to firstly consider any additional costs you may incur as a result of the loss:

A multiple of salary (to cover the training and salary for a replacement key individual)
Recruitment costs to replace the key person
Loan repayments.

In addition to tangible costs we might suggest cover worth a multiple of the gross or net profit a key person generates for the company, using a different multiple if the business is growing or breaking even.

We help companies with this all the time, so we’re well-placed to provider regulated advice. You can see how we helped e-procurement firm Applegate set-up their key person cover here →

Common Keyman Insurance Questions...

How Does HMRC Tax Key Person Insurance?
How HMRC taxes Keyman Insurance premiums revolves largely around guidance that’s more than 70 years old known as the ‘wholly and exclusively test’.

The rule considers if the payout will be ‘wholly and exclusively for the purposes of the company’s trade’, i.e. just for the benefit of the business.

If so, premiums are typically a tax-deductible business expense against your corporation tax bill. If the policy fails this test, the company may have to pay tax on premiums.

What this means in practice is that, providing the payout is for the benefit of the company, premiums are usually tax-deductible.

However, where the payout benefits shareholders, such as if the key person is a director whose death would significantly affect the company’s share price, HMRC might consider the policy as for the non-trade purpose of protecting the value of the director’s shares and therefore the value of their estate.

Tax on the Payout

As for the payout, it’s HMRC usually considers this a taxable trading receipt. You must therefore gross up the benefit so the company gets the correct amount after tax.

One exception to this is generally where the payout is purely to repay a business loan. In this case, HMRC often sees it as a rebalancing of the company’s capital account and therefore doesn’t tax the benefit.
Do We Need To Put The Policy In Trust?
Generally speaking no, there’s no need to write Keyman Insurance into trust.

This is because the business pays the premiums and gets the benefit if a key person dies or becomes critically ill. Setting up the policy in trust could actually delay the business getting the money when it needs it the most, so we don’t usually recommended it.

Compare Keyman Insurance Quotes & Get Expert Advice…

The cost of Keyman Insurance depends so much on each key person’s circumstances. As a result, how much it costs can vary considerably even between two key people in the same company.

There are multiple factors to consider when you’re arranging cover and it’s important to get them right.

We are an independent insurance broker with a team of expert business protection advisers. We can help you work out how much insurance you need whilst comparing Keyman Insurance quotes from all the top UK insurers to get you the best deal.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We know that our clients give so much to their businesses. They therefore deserve first class service when it comes protecting that business and their interest in it. Here are just a few reasons why it makes sense to talk to us:

There is no fee for our service
We are an independent insurance broker who work with all the leading UK insurers
You’ll speak to a dedicated expert from start to finish
We are very proud of the 3027 and growing independent client reviews rating us at 4.92 / 5
Claims support when you need it most.
We are authorised and regulated by the Financial Conduct Authority. You can find us on the financial services register here 🧐

If you need business protection advice please don’t hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.

I’ve held a policy with Drewberry for several years now. They are always friendly, insightful and offer great service.

Dan Pettitt

13/01/2021