Keyman Insurance

What Is Keyman Insurance?

Keyman Insurance (now more commonly called “Key Person Insurance”) is a type of business protection which pays a cash lump sum to the insured company in the case of the death or serious illness of an employee covered by the policy.

A key person is an employee considered to be crucial to the running of a business and likely to be someone that the company would find hard to replace. For example, this could be a:

• Founder of the business or chief executive
• Company director
• High-performing sales person or business development manager
• Senior employee with business-critical responsibilities such as an IT manager, product designer or head engineer

What is the purpose of key person insurance?

Key person cover is designed to protect smaller businesses from the many disruptive scenarios that may be encountered when losing a key member of the team.

In smaller organisations, should a key person die or be unable to work due to illness, their absence can result in significant loss and stress.

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

The lump sum payout can then be used to help lessen the financial blow to the business and help ensure a high-level of business continuity.

What can a key person payout be used for?

There are generally no restrictions as to what a key person insurance payout can be used for within the business.

Examples of possible expenditures include:

• hiring of 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;
• repaying any outstanding business loans;
• mitigating any loss or decline in business revenues.

In a worst-case scenario, key person cover could even help wind down the company in a methodical, compliant fashion.

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 secure and comprehensive policy to cover this eventuality.

How is key person insurance taxed in the UK?

When creating key person insurance policies, UK providers are generally aware that businesses are likely to prefer that the insurance premiums are tax-deductible. However, HMRC have specific conditions regarding these policies which must be met and may change over time. Where the premiums of a key person policy are tax-deductible it is usually the case that any payout is classed as a trading receipt and will therefore be taxed via corporation tax.

How much should each key person be covered for?

When assessing the amount of coverage for each key person companies should estimate the potential financial impact their loss would have. Key considerations might include the loss of profits and the cost to recruit and train a replacement employee. Various formulas can then be applied with the help of a specialist insurance broker.

Helping Protect UK Small Businesses

In 2022 the Office for National Statistics Business Population Report found that 4.1 million businesses (74% of all businesses) in the UK did not employ anyone other than the business owner. Additionally, a further 1.18 million businesses employed no more than 9 people.

Since the impact and disruption caused by the loss of a key person is likely to be greater for small businesses, this type of insurance can greatly assist with mitigating risk and business continuity planning.

Keyman Insurance Quotes

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, smoker status and maybe referred to underwriting.

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

In the event of the death or serious illness of a key employee, please be assured that our team will handle your claim with sensitivity and care. We will liaise with the insurer on your behalf to make sure that your claim is paid as soon as possible.

Disclaimer: The information provided on this page regarding keyman and key person protection policies and their tax implications is intended for general informational purposes only and should not be construed as tax advice. Tax regulations are complex and subject to change. The impact of tax laws and regulations can vary based on individual circumstances and may differ based on various factors. Before making any decisions related to key person protection insurance or understanding the specific tax implications for your business, it is essential to consult with a qualified tax advisor or accountant. Black Lion Insurance does not provide tax, legal, or accounting advice. All content is provided without any warranty, express or implied, regarding its accuracy, completeness, or applicability to your specific situation.