Key Person Insurance
Key person insurance, also known as key man insurance, is a vital form of business protection in the UK.
Protecting Your Business with Key Person Insurance
Key person insurance, sometimes called key man insurance, is a crucial safeguard for businesses in the UK. This type of policy protects a business from the financial impact if a key employee or director becomes unable to work due to death, critical illness, or disability. By securing a lump sum payout, businesses can cover the costs of recruiting and training a replacement, compensate for lost profits, and ensure continuity during challenging times.
- Provides financial protection to a business if a key employee or director dies, becomes critically ill, or disabled.
- Helps maintain business continuity, cover replacement costs, and protect lost revenue.
- Boosts investor and lender confidence while offering potential tax-free payouts.
How can we help you?
Contact us at Templar Mortgages - 0121 453 4244.
Essential Aspects of Key Person Insurance
1. Purpose and Benefits
Key person insurance helps maintain financial stability by providing funds to manage operational disruptions that may occur if a vital employee is absent. It protects critical skills and knowledge, ensuring the business can continue running smoothly even during unexpected changes. This type of insurance can also boost investor confidence by demonstrating proactive risk management and can reassure lenders when securing business loans, sometimes even acting as collateral.
2. Identifying Key Personnel
A key person is any individual whose absence would significantly impact the company’s operations and financial health. This often includes owners, directors, and executives, as well as senior managers and lead salespeople. Employees with specialised skills or knowledge essential to the business also qualify as key personnel, as their contributions are crucial to ongoing performance and success.
3. Determining Coverage
The amount of insurance should reflect the financial impact of losing a key individual. Factors to consider include the costs of recruiting and training a replacement, potential lost revenue, and outstanding business debts or financial obligations. Seeking professional advice from an insurance advisor can help determine the appropriate coverage level for your business’s needs.
4. Premiums and Policy Customisation
Premiums are influenced by the key person’s age, health, and role within the company, as well as the chosen coverage amount and policy type, whether term or whole life. Additional considerations such as medical assessments or critical illness riders can also affect the cost. Policies can be customised to suit the business, providing flexibility in coverage, policy type, and optional benefits such as critical illness or disability protection.
5. Tax Implications in the UK
In most cases, premiums for key person insurance are not tax-deductible, but the payout is generally tax-free. However, tax treatment can vary depending on individual circumstances and the specific policy. Consulting a tax adviser ensures clarity on any obligations and potential benefits.
Ensuring Business Continuity and Confidence
Key person insurance is an essential tool for protecting a business against unexpected losses. By safeguarding critical individuals, businesses can maintain financial stability, continue operations, and strengthen stakeholder confidence. Working with insurance and tax advisers ensures that the policy is tailored to your company’s needs and provides the most effective protection.
FAQ - Key Person Insurance UK
What is Key Person Insurance?
Key Person Insurance (also called Keyman Insurance) is a type of business insurance that protects a company if a crucial employee – often a director, manager, or other key contributor – dies or becomes critically ill. The policy pays out a lump sum to the business, helping cover financial losses, maintain operations, or fund recruitment and training for a replacement.
Who counts as a “key person”?
A key person is an individual whose skills, knowledge, or leadership are critical to the success of the business. This could be:
A founder or director
A top salesperson or client relationship manager
A specialist with unique technical expertise
Any employee whose absence could cause financial strain
How much cover do we need?
The amount depends on the potential financial impact of losing that individual. Businesses often base it on:
A multiple of the person’s salary/profit contribution
The cost of recruiting and training a replacement
Outstanding loans or financial obligations tied to that individual
Is Key Person Insurance tax-deductible?
In the UK, premiums are not always tax-deductible. HMRC decides based on the “Anderson Rules” (the policy must be for the benefit of the business, the person is an employee, and it’s not linked to shares/investments). Generally, if the policy is purely for loss of profits, premiums may be deductible, but payouts are then taxable.
What’s the difference between Key Person Insurance and Shareholder Protection?
Key Person Insurance protects the business against the financial loss of a key employee.
Shareholder Protection ensures surviving shareholders can buy back shares if a co-owner dies or becomes critically ill.
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