keyman insurance

This page was last updated on 1 July 2022

Keyman Insurance

What is Keyman Insurance?

Keyman insurance is taken out by businesses who want to insure key people in the business. By taking out key person protection you enhance your business protection. This is because if a key employee dies the insurance policies will pay out, providing profit and loan protection.

Topics that you will find covered on this page

You can listen to an audio recording of this page below.

What is a Keyman life insurance policy?

A keyman insurance policy is also called key worker insurance. It is insurance that a company owner takes out for an employee that is highly valuable to the company. A key person insurance policy will protect your business from loss of profits in the event that this very valuable employee passes away. 

The insurance provider will pay out a cash lump sum, the exact amount depending on the amount of cover you took out in your plan. This should cover all or some of the profits your business would miss out on when losing a key worker. It can also cover loan repayments. 

What will be covered by a Key Man Policy?

The cover is designed to financially guard your business in the event that you suffer the loss of a key person from your business. All plans are life insurance policies, so they cover the death of a key member of staff.

Some plans will be more comprehensive and cover critical illness, too. This means that you can claim on your key man cover if a key person is diagnosed with a disease the policy covers. These plans that have both life and critical illness cover are typically more expensive.

Another variant of the standard keyman insurance policy includes a component that protects income. Income protection ensures that if key people are out of work for a long time, they still receive an income. 

So, depending on the type of man cover you want, key person insurance can be used to cover salaries, life, and critical illness for your staff. 

Here is a short video explaining what keyman insurance is.

Does my business need key person insurance?

In the UK only around 50% of businesses actually have key man cover. However, key man insurance can be really crucial to protect your profits. 

All employees are important to a business, but certain workers are highly crucial for financial success. If you lost such a crucial member of your team, would your business be able to continue, and more importantly continue making profits?

Most companies have at least a few key people. If you are still undecided you should get some key person insurance professional advice. 

Make sure any key person advice service you used is authorised and regulated by the financial conduct authority

A new start-up might want keyman insurance because when you first set up you might be very reliant on a few individuals. Their technical skills, leadership, or creativity might be crucial for getting your business up and running, and starting off the initial growth. 

Even for an established business this key employee insurance can be really beneficial. Firstly, you probably still have employees that would be very hard to replace. 

Secondly, if your business does suffer financial loss as the result of losing a key worker, other workers might be tempted to leave. The effects can snowball on and on, but if you have a key worker policy in place you could be protected. 

Should I include critical illness cover for my key person?

The life insurance component can make the experience easier if your business loses a key person. However, business continuity might be better if you include critical illness too. 

This is because there are certain illnesses or diseases that if a key person got they would not be able to work. Thus, the effect on the business would be no different. 

Of course, including this component in your key person cover comes at an added cost. You can always discuss the pros and cons with an expert advisor. 

Who is deemed a key person in my business?

Key people are employees that, if they died or were unable to work, the profits of the business would heavily suffer. 

Who exactly qualifies as a key person in your business really depends on the unique nature of your company. Typically, it will be the CEO, business owner, or director. 

It can, however, be used to insure an employee with a unique and valuable skill set, or someone that performs very highly. 

"Keyman insurance is taken out by businesses who want to insure key people in the business. By taking out key person protection you enhance your business protection."

What is the typical price of Key Person Insurance?

The exact price of key person insurance will depend on whether it is being used to cover life only, or if it is being combined with critical illness and protection of income. 

Key person insurance could be as cheap as £2-£2.50 per week. 

However, the end cost will depend on the specificity of your keyman insurance policy. Things that can affect the cost of key man insurance include:

  • How valuable the business is deemed to be
  • How critical the key person is to the business
  • Whether you include critical illness cover in the keyman insurance quote 

So, you can see how and why the cost of a keyman insurance policy is hard to figure out. The best thing to do is get advice and a quote from a member of the insurance cover team. 

Will keyman insurance be tax deductible?

Whether your company’s key employees insurance is tax deductible depends on the specific way you would use the money if you made a claim . HMRC have some confusing rules on key man cover and tax, so getting help from an advisor can be really beneficial. 

Sir John Anderson outlined the broad principles on the matter back in 1944. Generally, whether you can get corporation tax relief depends on whether the insurance plan is a business expense, or not. 

Is Keyman insurance a business expense?

Businesses can only technically claim it as an expense if the holdings are deemed to be ‘insignificant’. This typically means below 5%. 

Furthermore, the policy can only be used to cover a member of staff. It cannot be a whole life policy. 

Finally, the insurance must only cover lost profits, to be deemed an expense. If it includes things like a business loan then you cannot deem it an expense and have it exempt from corporation tax. 

To find out more about whether your insurance and business loan (if you have one) can be exempt from tax seek professional guidance. 

Can I write my business’ key man insurance into trust?

Generally this type of long term insurance will not be written into trust. 

How does keyman cover and the policy work?

Like with standard life insurance, the premiums/policy cost is determined by the insured persons health, age, lifestyle factors, etc. The difference is that the company pays for the insurance, not the individual themselves. 

Therefore, if you make a claim, the business is the policy ‘beneficiary’. This lump sum is used to relieve the company of any financial issues loss of this crucial person might cause. 

The only case in which the insured person benefits too is when the policy covers their income via salary protection. 

Generally, the providers will give the business or company owner one big lump sum once the claim is cleared. Sometimes, though, the claim will come as monthly amounts. This is something you decide on when you take out the policy.

How much will keyman insurance pay out? 

Again, this is something that you must determine when taking out your UK insurance policy. The level of cover is something you might want to speak to advice and support services about, to choose the best level for your business. 

Some common ways payouts are calculated are as follows:

  • Taking a multiple of the insured person’s salary 
  • Calculating how much profit that individual brings 
  • Working out how long recruiting a replacement, and earning back lost money, would take 

As we have said, the way the payout is calculated and its exact amount is not set in stone. These are all things you need to decide before you sign the contract, because these details will influence your premiums. 

key man insurance policy

What providers should I consider for my key man insurance policy? 

All leading insurance firms in the UK tend to offer key person insurance. You should always shop around, because different firms might have different deals depending on the level of cover you want for your employee. 

The main key man insurance providers in the UK are Aegon, AIG, Aviva, Legal & General, Royal London, Vitality, and Zurich. This wont  mean they always have the top deals, though. 

As with any financial product, help from an expert advisor is strongly recommended. Their experience can not only find you a better deal, but make the process much more efficient. Make sure you choose a trusted company for advice, with good reviews and regulated by the FCA.

If you choose not to go with an advisor, make sure you shop the full market carefully yourself. Otherwise, your business might suffer financially. It is always a good idea to have the policy documents proofread by a trusted friend or co-worker, too.

What is the typical policy length?

Keyman plans tend to last from 5-10 years, though some will last for more years than this. At the end of the policy term you can reassess the needs of the business. Then you can choose to renew the plan, modify it, or end it.

Typically there is no cancellation fee if you change your mind. You can simply stop paying the premiums during the term, and incur no extra charge. You should always speak to the provider before doing this, though, as some policies might have different rules on cancelling. 

What advantages are there to insuring a key employee?

Essentially, the advantages are all to do with financial protection of your firm. Some workers are huge assets to the company. They can directly or indirectly contribute a lot to the annual turnover. 

If these workers passed away, the profits of your company could fall dramatically. But, with insurance cover then you can protect the business from financial struggles. 

The payout can help you keep running while you find someone to replace the worker you lost. You could also use the money to train up a replacement, or alter your business strategy. Whatever it is you choose to do, you won’t lose out financially while you figure it out. 

Furthermore, some plans come in a package with critical illness. This means that if an employee had, say, a heart attack and couldn’t return to work, you would still get the above explained payout. 

If you choose a bundle with income protection, there are even more benefits. For example, some companies offer staff their salaries if off sick for a long period of time. However, this can become expensive- unless you have an insurance policy to cover it of course. 

Finally, there is normally no fee for ending the policy before it technically finishes its term. So, you have the capacity to change your mind. Of course, you will need to double check this in the terms and conditions of your specific plan. 

key person insurance

What are the drawbacks of keyman insurance?

As with most insurance policies, there is a certain likelihood that you never claim on the policy. Then, keyman insurance will have been a ‘wasted expense’. But, no one can predict the future, so mitigating the risk is important. 

Another disadvantage arises if the worker decides to leave. You are not covered by keyman insurance in these circumstances, and the money paid was wasted. 

Furthermore, keyman insurance can be expensive. This is especially true if the profit loss of a key person would be high, as then the insurance costs will be higher. 

The reality is that you need to weigh up the costs of the insurance vs the risks of not having it. Only you can make the final call/decision, but you can speak to a professional advisor to get some tips. They can help you figure out what you should do. 

keyman insurance

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