Keyman & Key Person Cover

Do I really need Keyman Cover? - What is Keyman Cover? - How much Keyman Cover do I need? - Tax Position

So you have Public Liability Insurance, Employer's Liability, the vehicles and stock are insured, you even have extended warranty on the photocopier - everything is covered. No point in reading on then? 

If you have found yourself researching Key Person Assurance, chances are you do not feel everything that should be insured is insured? You may have become aware that the loss of a member of the board or key person on your team, due to death or illness, would have a detrimental effect on the business. 

With an estimated 92.5% of the UK's business's being made up of 10 people or less, 3.9 million of those being made up 4 employees or less, a lot can hinge on very few key people. The figures become even more alarming when you start to look at the statistics in relation to premature death and critical illness before normal retirement age. 

The risks of loosing a key person due to illness and death are very real, 

  • In fact 1 in 3 men aged 30 will have a stroke, cancer or heart attack before the age of 65, and the same fate will happen to 1 in 5 women of the same age*.
  • 1 in 7 adult deaths occur before retirement age**. 

Back to start of page

Do I really need Keyman Cover? 

The best test of whether you actually need keyman cover (short of waiting until the worst happens), is to pick each director or staff member and ask the following questions. 

  • If they went tomorrow would there be a negative impact on the business?
  • What effect will this have on clients, sales, turnover and profit?
  • Do they have a unique skill or knowledge that cannot easily be replaced?
  • Is there someone already on the team who could do their job?
  • If there is a team member who can take over, who will do their job?
  • Will you have to recruit a replacement?
  • If you have to recruit how much will it cost, how long will it take and how will you pay them?
  • If it's a business partner or fellow shareholding director, can the business still afford to pay them what they are used to whilst they are sick or support their family if they have died? In this event you should also look at Shareholder Protection.
  • Will this result in the bank calling in their loans or looking to reduce your overdraft facilities? 

If in answering these questions you have become aware that the loss of any one person would result in a notable financial cost or risk to the business, you have located your key person or key people. 

The next step is to look at how to reduce the risk of their loss. Long term this should be to put in place good succession planning, however this does not fix things immediately and for a few will not be appropriate. It is for your business's immediate needs and more specialist roles that keyman cover should be put in place.

Back to start of page

What is Keyman Cover?

Keyman Cover is a life or life and critical illness policy which in the event of a claim is designed to pay out to the business, not the individual who is insured. The business is typically the policy owner and the keyman policy is in many ways a standard life assurance policy in cost and cover. If you require a quote our Online Term Assurance page will help give indicative rates. Keyman policies are, however, specifically designed for the purpose and as such simply using a standard personal life assurance will not provide the correct contract.

The concept of keyman cover is that in the event of the loss of a keyman or key person due to death or critical illness, the company will receive the proceeds of the policy either as a lump sum or in pre-agreed instalments.

This injection of capital from a keyman policy can be used as the business sees fit.  Commonly it is used to:

  • Recruit and pay a suitable replacement for your key person.
  • Protect profits and business owner's incomes.
  • Cover any reduction in turnover whilst any replacement gets up to speed.
  • Repay any credit facilities, especially if the creditors start to call in their loans over concern the business may be in difficulty.

Back to start of page

How much Keyman Cover do I need?

The two most common methods for working out how much cover is required are,

1) Multiple of salary - The key person's salary is multiplied by a factor, normally between five and ten times. The advantage of this is that it is straightforward to work out. However, it may not give a true reflection of the actual impact the loss of that person may have on the business.

2) Proportion of profits - This method is far more accurate and takes into account the key person's salary, annual profit and the amount of time it would take to replace the key person.

Back to start of page

Keyman Tax position 

Interestingly there is no specific tax legislation in relation to Keyman Cover. It is open to the HMRC interpretation of whether the plan is for the benefit of the business or the business owners. 

Generally tax relief on the premiums will be granted provided the relationship between the Key Person and Business is that of employer/employee and the Key Person has no notable interest in the ownership of the business. The disadvantage of actually obtaining tax relief on the premiums is that when a claim is made the policy proceeds can be taxed as a business's receipt. 

If the Key Person is one of the business owners (typically with a 5% or greater stake in the business) the keyman policy will most likely not obtain tax relief on premiums, however, any payout will most likely not be taxed. 

A simple letter to your local inspector of taxes can provide clarification of the HMRC's view of your particular policy.

If you are considering Keyman Insurance, please feel free to contact us for Independent Key Man Insurance Advice. We are able to provide appointments at your office across the whole of West Sussex - Brighton, Hove, Haywards Heath & Crawley, East Sussex, Surrey - Croydon Sutton, Reigate, Redhill,  South London - Wimbledon, Fulham, Chelsea and Hammersmith and Central London.

* Source: ERC Frankona 1998, ** Source: Office of national statistics. Death registrations 2005

Back to start of page