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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 |
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
- 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
- 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
- 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
- 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
- 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
- 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 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 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 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 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.
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
I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.
Brendan Kelly
26/09/2019
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