Everything you need to know about keyman insurance

 Would your business survive if a key member of staff suddenly passed away? It’s probably not something you want to think about. But a sudden death or long-term absence could have a huge impact on your company’s success. You need to prepare for the worst-case scenario – and the best way to do that is to invest in a keyman insurance policy, such as that available at Rigby Financial.

Our insurance advisors are extremely knowledgeable in this area, and here they answer some of your most frequently asked questions about keyman insurance.

Business owners considering keyman insurance

What is keyman insurance?

Keyman insurance is a policy taken out by a business to ensure their most valuable employees. It helps to think of it as life and critical illness cover for those who are crucial to your company’s success – whether that’s the CEO, your top sales guy, or someone with a specialist skill set.

If any of these key people were to suddenly die or fall ill, a keyman insurance policy will protect your business against the financial repercussions. A lump sum is paid-out directly to the business and this can be used to cover the cost of any profit losses, replacement staff, or loan repayments. It will keep you afloat during a difficult time and could be the difference between your survival or closure.

What does keyman insurance cover?

Primarily, a keyman insurance policy provides cover for death. It will pay-out for a critical illness or disability, which prevents your employee from working. In some cases, with the addition of an ‘income protection’ clause, it may even cover the cost of temporary staff – who are needed due to long-term sickness absence.

Each policy will have a slightly different definition of a ‘key person’. However, generally speaking, keyman insurance can cover anyone who is essential to the financial success of your company. There is usually the founders and directors. But it can also include employees who generate a large percentage of profit and those with a niche talent or specialist knowledge-base.

Key people covered by a keyman insurance policy

Do I need keyman insurance?

The answer to this question is simple. If you own a business then yes, ideally, you should have keyman insurance. Your staff are your greatest asset and you need to be sure that – if the worst happened and an important person was no longer around – your company could cope with the change.

It’s particularly important to invest in key man cover if you’re a relatively small or new company. This is when you’re most reliant on your staff and losing a key member could be the difference between failure or success. You may also be asked to take out keyman insurance when applying for a business-related bank loan, as the pay-out can be used to cover the debt.

Who is a key person?

A key person is someone whose death, critical illness, or disability would have a serious effect on the future profits of the company. In any given business, there will at least one person (or more) who can be regarded as ‘key’ and should be covered by a suitable keyman insurance policy. This could be someone who has a financial stake in the business or someone who plays a fundamental role in its success.

You can often determine who is a key person by asking:

  • Are there any loans or overdrafts that depend on the key person? 
  • Would their absence affect business expansion plans or ongoing projects?
  • Would the business be in danger of losing customer orders?
  • Would it result 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 depend on the key person? 

What level of keyman insurance do I need?

This will depend on a number of factors – including, most importantly, the key person’s yearly salary. As a general rule-of-thumb, this figure should be multiplied by 5 to calculate the absolute minimum level of protection that you need. For example, if a director earns £100,000 a year, their keyman insurance policy should ideally cover £500,000 (or more) in the event of death or illness.

You should also consider how much profit they create and how much it would cost to find their replacement. The bigger their contribution to the company, the more coverage you will need.

Is keyman insurance tax deductible?

If term assurance is selected, the premiums of keyman insurance are usually eligible 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 5 years or less
  • not being convertible

The local tax inspector will need to confirm the situation. If the policy is eligible for tax relief, any payment to the company (of the sum assured) would be taxed – as a trading receipt – at the usual rate of corporation tax. It’s important to take this into consideration from the outset and, in most cases, we recommend raising the sum assured by the keyman insurance policy to compensate for what you will lose in tax.

Some companies may require cover for longer than 5 years, in which case, a ‘whole of life’ plan is more appropriate. Alternatively, term assurance plans can also be provided on a five-year renewable basis – for all combinations of death, critical illness and total and permanent disability benefits. This allows the company to continue cover beyond five years, but still satisfies HMRC rules for corporation tax relief.

Where can I buy keyman insurance?

Most Financial Advisers now offer key person insurance. But when purchasing a new policy, it’s worth speaking to an Independent Financial Adviser (IFA) – such as Rigby Financial. Our experts can offer impartial advice on the best keyman insurance policy for you. They will identify the ‘key people’ in your company, select an appropriate level of cover to make sure you are fully protected.

Business owner signing keyman insurance policy

How much does keyman insurance cost?

The cost of a keyman insurance policy varies depending on a number of factors, including the insurance provider, the ‘key’ people to be insured and the level of cover. Here at Rigby Financial, our goal is to make sure your business can look forward to a secure and profitable future – and we will do everything in our power to identify the best keyman policy for you, at the best possible price.

Find out how much coverage will cost and request a quote online today.

Get in touch with Rigby Financial today

If you would like to find out more about keyman insurance, or any of our other business continuity insurance policies, please feel free to get in touch. Either call us today on 01744 886077 to chat to an expert or send an email to enquiries@rigbyfinancial.co.uk for further information.