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Essential For Any Key People

Key Man Insurance Cover

A key person policy pays the business a lump sum when a key person who works for that business suffers a specified critical illness or dies. It's a simple term assurance policy that protects the business against losing a key person.

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What Are The Main Features Of Key Man Insurance Cover?
  • Protect against loss of profits due to loss of a key person
  • Pay back overdrafts in the event of key person loss
  • Cover salaries, loaned money or dividends
  • Cover recruitment costs of replacement key person
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Finding the right policy

Do I need Key Person Insurance?

Many directors we speak to about key person insurance are looking for a policy that will allow them to buy back the shares of another shareholder should they die. If you are looking for this type of insurance policy, you are looking for a Shareholder Protection Insurance.

Shareholder Protection Insurance
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Protect and Safeguard Your Business

Who is defined as a key person?

A key person is anyone in the company or business that should they suffer a specified critical illness and not be able to work or even die, the loss would have a direct impact and detrimental effect on the business such as a financial impact or financial loss. They may be a key member who has specialist skills or a key individual such as a key sales staff member.

The business owner is usually a key person as their death or critical illness would usually have a huge impact on small businesses, and many would not be able to continue trading. If you have employees or members meeting this criteria, having key person insurance cover could be a great idea.

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How does key person insurance policy work?

A key person insurance policy pays a lump sum, also known as a sum assured, when a loss of a key employee occurs due to a specified critical illness or death.

Adding critical illness cover can be beneficial as a 40-year-old male is 4.1 times more likely to suffer a critical illness than die. Most policies provide terminal illness cover as a free feature when life insurance is taken out via a keyman insurance policy.

The business pays A monthly premium to the insurance provider each month for the cover based on a specific level of keyman insurance that has been taken out.

The individual circumstances and medical history of the person covered and their overall health are considered at the application stage. This will determine the keyman insurance cost.

In the event of the key person's death, terminal illness or specified critical illness, the keyman insurance cover will pay the sum assured.

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The business pays the premiums

Is Key Man Insurance tax efficient?

A key man insurance policy is very tax efficient. Any lump sum paid directly to the company will be tax-free and not treated as taxable income. Due to this, HMRC does not offer corporation tax relief on key person cover. Even though the business can pay for the premiums, it is not a tax-deductible expense.

The key member of staff or director will not be the owner of the insurance policy and will also not be entitled to the sum assured should such a loss occur. The insurance policy will be owed by the business. The key person will not be charged any benefit in kind or income tax on the premiums paid.

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More than just death protection

Key person critical illness cover

Critical illness can be as damaging to a business as death. A company's key people may need extended time off work if they are critically ill or have a serious illness.

This time away from the business can seriously limit the key person's contribution to the business and create a sudden loss in income that results in a profit loss.

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Getting the right cover

What level of keyman insurance do I need?

Assessing the business requirements for key person insurance may require further information and usually starts with calculating the financial loss in the worst-case scenario.

Does the company have any loan repayments or other expenses it has to pay out regularly? What would the extra cost of replacing your most valuable employees be?

As a rough rule, quantifying the lost income for the first 12 months is an excellent place to start. For example, a key staff member who generates £100,000 of revenue annually would need protection policies of £100,000 to replace the income the business would have lost.

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Other options for optimal cover

Is there an alternative to key person cover?

Another popular business insurance policy to consider is Executive Income Protection. This policy pays 80% of the insured member's monthly salary to the business if the insured member cannot work. This income can be used to pay the insured person additional sickness pay or by the business to pay someone else to cover their workload while off.

It has a much older range of cover than key person cover in that it will pay out for much less serious conditions such as stress, general illness or accidents. The policy can pay out for a period of time until the insured returns to work. Used in conjunction with key person cover and shareholder protection insurance, it can provide an excellent range of cover for the business.

Key person policy
Who receives the benefit

What happens to the policy proceeds?

If there is a payout from the key person cover, the key individual will not receive the sum assured. The lump sum would be paid directly to the business and can be used to help replace the key man or woman while the business finds a replacement.

Key man insurance does not have a female alternative such as key woman insurance, both fall into the category of key person insurance.

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Keyman insurance cover

Which insurers offer key person cover?

Many of the main insurers offer key man insurance, such as Legal & GeneralZurich, Aviva, LV, Vitality and several others. As an independent regulated broker, Executive Life can obtain a quotation from every insurer and discuss the benefits and drawbacks of each provider to allow you to make an informed decision.

Key person insurance
Which kind of cover?

Level, inflation-linked or decreasing cover?

Many businesses take out key person insurance policies with increasing levels of cover. This indexation helps reduce the risk of inflation and helps ensure key personnel over extended periods.

Obtaining some independent advice or using the services of an independent financial adviser is advised when choosing the best indexation option for your key man cover, as you need to be careful not to be over or under-insured.

Key man cover
Cost of premiums

How much does a Key Person Life Insurance Policy cost?

Key person cover is a standard term assurance policy and is priced by insurance providers like a personal life insurance policy would be. It means there is no additional premium because the policy is a key person's insurance.

Protecting your business with key person cover on a death-only basis is usually more cost-effective than you think. Other add-on benefits like critical illness cover can make the premiums on keyman insurance more expensive as there is a much higher risk of critical illness than death.

Other options, such as total permanent disability, can also be added, and this can also make a difference to premiums paid for by the business.

Keyperson insurance
Insurance for directors

Does a business owner need key person insurance?

A business owner is usually a key person within a business and can be its greatest asset. Therefore, key person insurance would be relevant.

How much cover they would need should be carefully considered, and things like an interim director or stand-in manager should also be considered when trying to find the right cover.

A key man policy can be essential to a company and help protect your business as a company director from the event of death and illness.

Key person policy
Various aliases

Why is keyman insurance policy known by different names?

These policies have various names, such as keyman insurance policy, keyman insurance, and key person insurance. Some variations have a space between key and man, and some use keyman insurance policy. 

Whichever term or spelling is used, the policy is simply a life insurance policy taken out by the company for key people.

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What length cover is available

How long does Key Person Insurance last?

As with any other term insurance policy you can pick how long cover will last. Policies usually have a long stop date of age 75, but this will depend on the insurer as different providers have varying terms.

The older you are when you take out key person insurance, the more expensive the premiums will be; therefore, securing cover in your younger years can save the business money in the long term.

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The mechanics behind the cover

How does Key Person Protection work?

A business takes out a key person policy of a key person within the business. If that person is unable to work due to a specified critical illness or death, the key person policy will pay the benefit to the business. The business then uses this payment to smooth out the effect of the drop in income while a replacement is found.

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Temporary cover

How long will it take for me to be covered?

Most key person insurance providers offer a level of cover as soon as your application has been submitted. This is called temporary cover and means that should you die before the policy has been accepted, a smaller level of cover would be in place. Every insurer offers different options in this regard and should be considered on a case-by-case basis.

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Free support for Business Protection clients

Keyman insurance falls into the category of business protection, and as such, many providers now offer a range of additional benefits to the company or business that owns the keyman insurance.

One benefit is HR support, where the company can call an HR hotline to ask questions about employment issues that may affect the business or key members of staff. Other providers offer mental health support for keyman insurance owners and key people who work for the company.

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Relevant Life Insurance

Relevant life insurance is the only life insurance policy that is an allowable business expense and, therefore, provides your company with corporation tax relief and essential life insurance for company directors and even employees.

It is a kind of death-in-service benefit where a lump sum benefit is paid to the family of the insured in the event of the death of the person covered. There is no inheritance tax to pay as the relevant life policy will be left into a relevant life plan trust, which may take the form of a discretionary trust.

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Executive Income Protection

Executive income protection is a tax-efficient policy that pays 80% of your monthly income to the business if you are unable to work due to sickness or ill health, until you return to work.

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Shareholder Protection Insurance

In the event of the death of a shareholder the shares that they previously owned could be inherited by another family member, making this person you may never have met, a key shareholder in the decision making of your business. This is a very common risk that can be eliminated by using a simple shareholder protection policy.

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Private Business Health Insurance

Private business health insurance can be paid for by your company as an expense and can also be extended to include your family. Corporation tax relief is available, however, a benefit in kind tax will be due on the value of the business health insurance premiums. This is usually more tax efficient than paying for the premiums personally.

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a guide to key man insurance uk for business owners