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Keyman Insurance or Executive Income Protection?

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Keyman Insurance and Income Protection can seem very similar. They both insure against an individual within a business becoming ill, although Keyman Insurance can also protect against the death of the individual, too.

Many of our clients aren’t sure of the difference between the two, or are confused about which one they need.

Keyman Cover protects companies
It pays out a lump sum to the business for the business should a key person become critically ill or pass away. That way, the business can keep trading while the individual is ill, or replace them if they are rendered out of action permanently.

Income Protection is very much there for individuals
If you suffer an accident or sickness and become too ill to work, the benefit is ultimately paid to you to keep up with daily living expenses.

What is Income Protection Insurance?

Income Protection is there to insure against the risk of an individual becoming too ill or injured to work.

  • It pays out a monthly income – up to 80% of your pre-incapacity remuneration – in the event accident or sickness prevents you from earning.
  • Many people use Income Protection to provide a comprehensive sick pay insurance that is sometimes lacking among those who work for themselves.
  • Income Protection can either be paid for by the business, which is known as Executive Income Protection, or by the insured personally, which is simply Income Protection.
  • Company Directors often take out Executive Income Protection, liking the idea of having their business own and pay for the policy.
  • Executive Income Protection premiums are typically a tax deductible business expense (subject to the approval of your accountant and the local HM Inspectorate of Taxes) and aren’t considered a P11D or benefit in kind.
  • As Executive Income Protection is owned and paid for by the business, the benefit is paid back into the company. This means it’s subject to tax when it is paid out as a replacement for employee remuneration. It is up to the company to distribute the benefit in a tax-efficient manner.
  • For non-Executive Income Protection, the premiums aren’t tax deductible as they’re paid for out of post-tax income. However, to compensate, the benefit is usually paid tax-free.

What is Keyman Insurance?

Key Person Insurance protects companies against the risk of a key player in the business dying or developing a serious illness / injury

  • Life Insurance provides a cash lump sum should a key individual die (or is diagnosed with less than 12 months to live under Terminal Illness Cover)
  • Adding Critical Illness Cover to the policy will provide a cash lump sum for business should the key person develop a condition from a set list of serious illnesses / injuries
  • The key person could be anyone within the business responsible for profit generation or who otherwise is vitally important to the ongoing financial and commercial success of the company
  • Key Man Insurance is typically taken out for two main reasons: business continuity purposes (to ensure the business can continue without the input of a key person) or at the stipulation of an investor or lender who wants to protect their interest in your business.
  • For business continuity purposes, the premiums are typically a tax deductible business expense providing they’re taken out on the life on a non-shareholding employee, as these premiums are wholly and exclusively for the benefit of the business. However, the benefit will usually be taxed on a claim, almost like a trading receipt.
  • If Keyman Insurance is to protect a loan, premiums are typically not tax deductible as the premium is for the direct benefit of the lender, not the business. However, the benefit is usually received free from tax.

The tax treatment of Keyman Insurance by HMRC is a complicated area and we recommend you receive detailed advice from your accountant before proceeding with a policy.

Difference between Keyman Insurance and Income Protection

Key Man Insurance

Income Protection Insurance

Protects the business against the loss of a key individual, either through death or critical illness

Provides individuals, e.g. company directors, with a replacement income if they can’t work

Written on the life of the key individual, but usually owned and paid for by the business

Can be owned and paid for either by the business (Executive Income Protection) or by an individual

Pays out one lump sum on the death or serious injury of a key individual to support the business

Pays a monthly income – either directly to the policyholder or into the business to be distributed to an individual

Can be used to provide business continuity or to provide backing to an investment / corporate loan

Payout can be used however it’s required, typically on everyday expenses such as food and bills

Tax situation is complicated, but premiums can be tax-deductible in certain circumstances

Executive Income Protection premiums are usually tax deductible and aren’t a P11D / benefit in kind

When used to cover a business loan, the benefit is usually tax-free

Executive Income Protection is taxed at point of claim, whereas benefits are tax-free on personal plans

How much you can insure a key individual for will depend on your business metrics and how key they are to the business

You can insure up to 80% of your remuneration in the form of salary and dividends

You add sickness insurance via Critical Illness Cover, which will only pay out if you develop one of a set list of critical conditions of a specified severity

Income Protection is the most comprehensive sickness insurance available and will pay out if anything medically prevents you from doing your specific job subject to your pre-existing medical history

 Sam Barr-Worsfold Independent Protection Expert at Drewberry

If you’re looking to protect your business against losses caused by the death or serious illness of a key individual, you need Keyman Insurance.

If you want to protect your own income in case you can’t work to support yourself and your family, you need to look at Income Protection.

Sam Barr-Worsfold
Independent Protection Expert at Drewberry

Top UK Business Protection Providers

Executive Income Protection

aegon

Aegon

  • Maximum Entry Age: 59
  • Maximum Cover: 75% of pre-tax income to a maximum of £160,000 per year including yearly pension contributions and National Insurance contributions
  • Deferred Period: 4 / 8 / 13 / 26 / 52 weeks
  • Aegon Executive Income Protection offers a free health and wellbeing service, Health Assured, providing confidential support and advice.
unum

Unum

  • Maximum Entry Age: 64
  • Maximum Cover: 80% of earnings to a maximum of £300,000 per year as well as yearly pension contributions and National Insurance contributions
  • Deferred Period: 4 / 8 / 13 / 26 / 52 weeks
  • Unum Executive Income Protection offers free a Rehabilitation Service with policies, providing qualified consultants to give guidance and support to claimants.

Income Protection

aviva

Aviva

  • Maximum Entry Age: 59
  • Maximum Cover: Up to 55% of your gross earnings or up to a maximum of £240,000 per year
  • Deferred Period: 4 / 8 / 13 / 26 / 52 / 104 weeks
  • Aviva Income Protection includes Family Carer Benefit, which pays the lower of £1,500 or the monthly benefit if the policyholder has to stop work to care for a spouse / partner / child who can’t perform activities of daily living for more than 3 months.
liverpool victoria

Liverpool Victoria

  • Maximum Entry Age: 59
  • Maximum Cover: Up to 60% of your annual income before tax (maximum benefit of £12,500 per month)
  • Deferred Period: 1 / 2 / 3 / 6 / 12 / months
  • LV  Income Protection automatically includes fracture cover, which pays out a lump sum up to £2,200 in addition to your usual benefits
royal london

Royal London

  • Maximum Entry Age: 59
  • Maximum Cover: 65% of the first £15,000 income and 55% of the remainder, up to a maximum of £250,000 per year
  • Deferred Period: 4 / 8 / 13 / 26 / 52 weeks
  • Royal London Income Protection automatically includes fracture cover, which pays out a lump sum up to £4,000 in addition to your usual benefits if you receive a fracture of a specified body part
vitality

Vitality

  • Maximum Entry Age: 59
  • Maximum Cover: 60% of your earnings capped up to £2,500 per month and 50% of any earnings above, up to £16,666 per year
  • Deferred Period: 1 week or 1 / 3 / 6 / 12 months
  • Vitality Income Protection can come with a wide-ranging rewards program add-on that can see you earn lifestyle rewards and premium discounts in exchange for healthy living.

Key Man Insurance

aig

AIG

AIG 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.

  • Maximum entry age: 86 for Life only / 75 for Life and Critical Illness Cover
  • Minimum term: 3 years
  • Maximum term: 70 years for Life only / 50 years for Critical Illness Cover
  • Maximum cover: No maximum
  • Critical illnesses covered: 41, plus 10 additional critical illnesses
aviva

Aviva

Aviva Key Man Insurance forms part of its Business Life Insurance Options policy.

  • Maximum entry age: 89 for life only / 64 for Life and Critical Illness Cover
  • Minimum term: 1 year
  • Maximum term: 50 years
  • Maximum cover: No maximum for Life / £3 million for Life and Critical Illness / £2 million for Life and Critical Illness Cover with Total Permanent Disability
  • Critical illnesses covered: 43, plus 11 additional critical illnesses
legal & general

Legal & General

Legal & General was founded in 1836 and has since grown to become an international provider of insurance, pension and investment products.

  • Maximum entry age: 77 for Life and Increasing Life / 67 for Life and CIC and Increasing Life and CIC / 74 for Decreasing Life / 64 for Decreasing Life and CIC
  • Minimum term: 1 year for Life / 2 years for Increasing Life Insurance and CIC / 5 years or Decreasing Life and CIC
  • Maximum term: 50 years for Life only / 40 years with added Critical Illness Cover
  • Maximum cover: Unlimited
  • Critical illnesses covered: 39, plus 2 additional critical illnesses
royal london

Royal London

Royal 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.

  • Maximum entry age: 88 for Life Cover / 69 for Critical Illness Cover
  • Minimum term: 1 year for Life / 5 years for Critical Illness Cover
  • Maximum term: 72 years for Life only / 50 years with added Critical Illness Cover
  • Maximum cover: No maximum for Life / £3 million for Critical Illness Cover
  • Critical illnesses covered: 46, plus 14 additional critical illnesses

Business Protection Advice from the Experts

Many of our clients are key to the success of their business, especially individuals who are directors of their own limited company, but this doesn’t necessarily mean Keyman Insurance is right for them.

While Key Person Cover plays an important part in ensuring business continuity or protecting a loan or investment, it doesn’t help an individual who finds themselves unable to work in their company due to accident or sickness.

Tom Conner Director at Drewberry

Business Insurance, whether you need Keyman Insurance or Income Protection, is a complicated area and it’s beneficial to get expert advice.

We deal with such queries each and every day, we are here to help so please do not hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.

Tom Conner
Director at Drewberry

This firm is the best in the market!! The staff are experienced and they know exactly how to help with such major decisions. Thank you especially to Rauri: a 5 star service throughout. I will recommend and use Drewberry again.

Alberta Opoku
06/10/2019
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