Everything You Want To Know About Keyman Insurance Policy

Would your business survive if a key member of staff passed away all of a sudden? It is perhaps not something you wish to think about. But an unexpected demise or long-term absence could have an immense impact on your firm’s success. You’ve to prepare yourself for the worst-case scenario – and the best way to do so is invest in a key man insurance policy. 

What’s keyman insurance?

This is an insurance policy where the employer is the proposer and pays the premiums. It helps to think of it as life and critical illness cover for those who’re critical to your company’s success – whether that is the CEO, your top sales person, or someone with a specialist skill set. If any of these key people were to die suddenly or fall sick, a keyman insurance policy will safeguard your business against the financial upshots. 

Who’s a key person?

A key person is someone whose critical illness, disability or death would have a grave effect on the future profits of the firm. You can often determine who’s a key person by asking:

Are there any loans or overdrafts that rely on the key person? 

• Would their nonattendance affect business expansion plans or ongoing projects?
• Would the business be in risk of losing customer orders?
• Would it upshot in a loss of goodwill or hardening of suppliers’ credit terms?
• Would the business miss their administration or management contribution?
• Are there any loans or overdrafts that rely on the key person?

Is keyman insurance tax deductible?

If term assurance is chosen, the premiums of keyman insurance are generally entitled for corporation tax relief. This is subject to the plan:

• Being used to compensate for profit-loss following the loss of a key individual
• Having a term of five years or less
• Not being convertible

The local tax inspector will need to confirm the situation. If the policy is entitled for tax relief, any payment to the firm would be taxed – as a trading receipt – at the usual rate of corporation tax. It is critical to take this into account from the beginning and, in most cases, we advocate raising the sum assured by the keyman insurance policy to compensate for what you’ll lose in tax. 

Some firms may need cover for longer than five years, in which case, a ‘whole of life’ plan is more suitable. Otherwise, term assurance plans can also be given on a 5-year renewable basis – for all combinations of death, critical illness and total and permanent disability benefits. This lets the firm to continue over beyond 5 years, but still meets HMRC guidelines for corporation tax relief.