Key Person Insurance Quotes from the UK’s leading insurers

Key Person / Keyman Insurance

Table of Contents

• What is Key Person Insurance?
• Why do Businesses Need Key Person Insurance?
• How much does Key Person Insurance cost?
• Adding Critical Illness Cover
• Key Person Income Protection
• Key Person Quotes
• How is Key Person Insurance taxed in the UK?

What can a key person payout be used for?

Policies are often put in place with business continuity in mind. Funds can be used to hire consultants and temporary staff, recruitment of a permanent replacement, training and outsourcing.

Insurance providers generally do not place restrictions on what a key person insurance payout can be used for within the business. However, what a payment is intended for will determine how premiums and payouts are taxed.

A payouts are often used to repay outstanding business loans, although this is likely to have different tax implications.

Theoretically, the payout could even be used by the company to purchase any shares bequeathed by a deceased key person, although in this scenario, Shareholder Protection Insurance is likely to provide a far more efficient, secure, and comprehensive policy to cover this eventuality.

In a worst-case scenario, key person cover could even be used to place the company into liquidation in a methodical, compliant fashion.

According to the 2023 Office for National Statistics Business Population Report, 1.17 million UK businesses employ fewer than nine people. 223,000 companies employ 10 to 49 people and a further 37,000 are classified as medium-sized businesses with up to 249 employees.

For these businesses, losing key staff can have severe consequences. Whilst larger companies have sufficient human resources to absorb the loss of a key individual, smaller businesses are often highly vulnerable.

The key person may have brought valuable business development skills, important business contacts, a high level of expertise on which revenues rely, or the means to raise vital funds for future projects.

Any business that is dependent on the skills and experience of a key person is also dependent on that individual’s health.

Key person insurance can help mitigate that dependency and protect businesses against the worst happening to their most valuable employees.

The lump sum benefit can then be used to help lessen the financial blow to the business and help ensure business continuity.

How much should each key person be covered for?

Setting the right level of key person insurance cover requires an estimation of the financial impact their loss would have on the business.

Considerations should include:

• Loss of profits: Consider how the key person’s absence might affect revenue generation and profit margins. Where they play a crucial role in sales, maintaining client relationships, or the company’s operations, calculate the potential loss of profits over a 12-to-24-month period.
• Recruitment: Finding, hiring, and training a replacement can be costly. Think about expenses such as recruitment agency fees, advertising and the necessary package to attract a suitable replacement.
• Business continuity expenses: It may be necessary to hire consultants and temporary staff or outsource functions. Think about any increased marketing efforts required to maintain client confidence and stabilise the business.
• Knock-on financial impacts: Consider how the loss of the key person might lead to costs beyond their immediate responsibilities. Could their loss cause delays to projects or product launches?
• Debt obligations: Does the policy need to cover loans or other financial liabilities guaranteed by the key person?

As part of any application process, insurers are likely to request demonstrable evidence of the required insured sum.

Cover Limits

While insurers can look at any application on a case-by-case basis, they provide guidelines as to the maximum cover they may offer. These are often:

• 7 – 10x Annual salary
• 2x Annual Gross profits
• 5x Annual Net profit

When combined with critical illness cover, Keyman Insurance can offer broader protection.

If the insured key person is diagnosed with a serious illness, the policy provides the business with a lump sum. This can help businesses manage during a key employee’s prolonged absence due to illness.

Adding critical illness insurance to a policy can increase premiums considerably; this is highly dependent on the insured individual’s age and medical history. Given that many of the critical illnesses covered could cause a prolonged or permanent absence from work, many businesses request this as standard.

List of Critical Illnesses

The list of critical illnesses covered in a policy’s conditions can vary, and it is important to understand what is and is not covered. The severity of the illness will also be defined to make the assessment of any claim as black and white as possible. For example, cancers that are caught early and are easily treatable are unlikely to be covered. It is, therefore, advisable to check and compare the list of critical illnesses in any Key Person quote.

Key Person Life Insurance pays a lump sum if the insured employee dies or is diagnosed with a terminal illness. Key Person Income Protection, on the other hand, pays a monthly income to the business while an insured employee is unable to work due to illness or injury.

This type of policy protects businesses from a wider range of health issues that can cause long-term absenteeism. Instead of a defined list of terminal or critical illnesses, any illness or injury can qualify for a valid claim. The emphasis is instead on whether the condition prevents the insured employee from being able to carry out their work.

Policies can cover up to 75% of the gross profit directly attributable to the key person insured. With a maximum annual cover level of £250,000, policies generally have a maximum benefit period of 24 months.

This type of policy may be more suitable for small businesses concerned with the impact of losing key people to long-term illnesses or injuries as opposed to terminal illness or death.

Obtaining a key person quote can be a little more involved than many other types of insurance. It requires an understanding of the level and length of cover required, together with the personal information on any key people to be insured. The personal information is likely to include their occupation, age, medical history, and smoker status, and may be referred to underwriting.

This is why using a regulated, specialist broker has many advantages.

How key person insurance is taxed in the UK can depend on the purpose of the policy and how the business intends to or subsequently uses any monies received. Companies should always speak with their accountant or obtain tax advice before putting a policy in place.

1. Corporation Tax Deductibility on Premiums

HMRC may assess the overall purpose of a policy to determine whether the premiums are an allowable business expense and therefore afforded corporation tax relief. Premiums are more likely to be allowed corporation tax relief if the policy covers a short-term period (typically five years or less).

Generally Allowable

Policies intended to protect a business from short-term financial losses due to the death or incapacity of a key person. For example, these could include:

• Hiring consultants to ensure the successful completion of contracts
• Funding the recruitment costs required to find and replace the vacant position
• Training costs to fill the skill gap
• Outsourcing critical functions to ensure business continuity
• Marketing and PR focused on customer retention or to mitigate any loss of confidence or reputation
• Compensating customers for any delays or disruptions
• Covering associated legal and regulatory costs

2. Tax Treatment of Payouts

In most cases, the tax treatment applied to any lump sum payout will depend on whether the premiums were treated as a deduction.

• Tax-free: If no deduction was claimed for the premiums, the payout should be free from tax.
• Taxable: If the premiums were deducted as a business expense, HMRC is likely to treat the payout as taxable trading income.

If, after receiving a payout, the monies are used for a different purpose than what was originally intended, HMRC may reassess the tax treatment applied to both the premiums and any payout.