Keyman Insurance (aka Key Person Insurance)

Keyman Insurance or key person insurance as it's also known is a type of business protection policy which pays a lump sum to a company in the event that a key member of the team should die or become terminally ill. In this guide, updated for 2021, we explain exactly what keyman insurance is, what it covers, how it works and much much more.

Trustpilot star
Trustpilot star
Trustpilot star
Trustpilot star
Trustpilot star
Rated 4.9 on
AIG LogoRoyal London LogoLV LogoLegal and General LogoAegonLogoAviva Logo
AIG LogoRoyal London LogoLV LogoLegal and General Logo
AegonLogoAviva LogoThe Exeter logo
AIG LogoRoyal London LogoLegal and General Logo
The Exeter logoLV Logo
AegonLogoAviva Logo
AIG LogoRoyal London LogoLV LogoLegal and General Logo
AegonLogoAviva LogoThe Exeter logo

What is keyman insurance?

All businesses will have certain individuals who are key to operations, but that's especially true among small companies. Research by Legal & General found that 53% of SMEs would cease trading in under a year if a key person died or became critically ill with many struggling to find a replacement to allow them to get their business back up and running.

Keyman protection allows a company to insure itself against the financial loss it would suffer should a key person die, or be diagnosed with a critical illness (assuming critical illness cover is taken out with the policy). Keyman cover works in a similar way to an ordinary life insurance policy, but rather than an individual owning it, and paying the premiums, a business does and in the event the employee dies, the company receives a payout, not the individual's family.

Who is a key person?

A key person is anyone in a business whose skill, experience or knowledge contributes towards the success of the business. A key person could be one of a number of people in the business, such as: The Chairman, Managing Director, Financial Director, Sales Director, Sales Manager or IT Expert.

Essentially that's anyone whose death or long term absence could lead to financial loss for the business via:

  • White tick
    Loss of confidence among customers
  • White tick
    Loss of profit
  • White tick
    Loss of business contacts
  • White tick
    Needing to recruit and train a replacement

What does keyman insurance cover?

Depending on the level of cover you opt for, what is and isn't included will vary. Typically policies will, at a minimum, cover the death and terminal illness of the key person, but you can also opt to cover for critical illnesses and long-term disabilities.

Keyman protection comes in two forms:

Life insurance only

Pays a cash lump sum to the business if a key person dies or is diagnosed with a terminal illness (with less than 12 months to live).

Life insurance with critical illness cover

By adding critical illness cover you're protecting the business should a key person be diagnosed with cancer, suffer a heart attack or stroke. These are just example illnesses and for a complete list, you should always refer to your policy documentation.

Have a question about keyman insurance?

How does keyman insurance work?

Unlike traditional life insurance where an individual covers themselves and in the event of their death their beneficiaries receive a payout, keyman insurance is taken out and paid for by a company and, should that employee die, it is the company that will receive a cash lump sum, not the employee’s family.

The order of events is as follows:

how does keyman insurance work
  • 1

    An employer takes out a keyman insurance policy

    Choosing whether they would like to include cover for critical illnesses.

  • 2

    The employee dies (or is diagnosed with a terminal illness)

    The company makes a claim on the insurance policy.

  • 3

    The insurer pays a lump sum to the company

    The proceeds are paid to the business.

What can keyman insurance be used for?

Businesses can use the cash lump sum received from a keyman insurance policy for a variety of purposes, for example:

When should you consider keyman insurance?

Keyman insurance provides a company with business continuity, so it's a type of protection which should be considered regularly. Whether you're just starting out and have a core team of skilled individuals who are fuelling the business's growth, or you're an established firm with a team that's been with you for some time, keyman cover is a sensible choice to ensure you can maintain your company's success.

Small businesses that rely heavily on their directors and founders should, in particular, consider keyman insurance, as losing those influential individuals often leads to business failure. The same is true with a key member of staff like a salesperson, or someone whose technical knowledge would be difficult to replace without a financial cost to the business.

What level of keyman insurance do I need?

Every business is unique and there's no set amount of cover you should opt for, but there are a couple of methods you can use to try and calculate the level of cover required.

You need to work out the individual's value to the business, and to do this you need to try and calculate the proportion of net or gross profit that the person is directly responsible for. Once you've got that figure, it's usually a good idea to look at quotes for at least 2x the amount of gross profit they are responsible for or 5x net profit.

Of course, what is right for your business may not follow this rule, which is why we always recommend seeking financial advice from an independent expert.

Speak to an independent financial adviser for free

How is it taxed by HMRC?

How HMRC taxes this insurance is primarily down to who will receive the benefits. The rules can be complicated as they depend on how a business intends to use the policy.

Firstly, if the plan covers a shareholder, then the premiums will rarely be eligible for corporation tax relief as the plan benefits someone other than the business. Moreover, a claim for the death of a shareholder usually counts as a "trading receipt", which means HMRC will also tax the payout. If HMRC does tax the payout, then you'll need to gross up the benefit. This is the process of insuring yourself for a larger sum than required so that you're left with the correct payout after the taxation.

If the policy is covering employees, it will usually be seen as benefitting the company and therefore premiums are generally tax-deductible. However, the benefit will still count as a trading receipt so the payout will be taxed.

Finally, if a keyman policy is taken out to protect business loans, then HMRC sees that as a benefit  for the lender, not the business, so the business cannot deduct premiums against corporation tax. In this instance, HMRC usually doesn't consider it to be a trading receipt and therefore the payout isn't liable to any tax.

Confused? Don't worry, this is the exact reason why we partner with the independent financial advisers at Sandbourne Ltd. They're authorised and regulated by the Financial Conduct Authority and can answer any questions you might have.

Where can I buy keyman insurance?

Much the same as other insurance products, you can buy keyman insurance by going directly to the providers or by going through an intermediary. The benefits of working with an independent intermediary or broker is that they can quickly compare all of the insurers and give you bespoke advice, tailored to your business. The service brokers provide is also free, so you can compare the market and get advice without paying a penny.

Where can I buy keyman insurance

How much does keyman insurance cost?

Similarly to personal life insurance, there are a number of factors which will affect your premiums. Some of these you'll have control over, others you won't.

They include:

  • The total amount of cover chosen
  • The length of policy
  • Whether you choose to include critical illness cover
  • The age of the employee
  • Their current state of health
  • Whether they are a smoker
  • Lifestyle and hazardous activities
  • Family medical history
How much does keyman insurance cost

Compare keyman insurance quotes

To give you an idea of the potential cost of keyman insurance we've performed some comparison quotes. The following quotations are based upon a healthy non-smoker who lives in London, working as a managing director. The policy will provide £300,000 of cover for 10 years and we've broken it down by insurance with and without critical illness cover:

Life and terminal illness cover only

35 year old - £10.47 p/m
40 year old - £14.77 p/m
45 year old - £21.20 p/m
50 year old - £31.68 p/m

Life, terminal illness and critical illness cover

35 year old - £62.70 p/m
40 year old - £91.55 p/m
45 year old - £138.36 p/m
50 year old - £213.62 p/m

*Prices correct as of 18th November 2020

As you can see keyman life insurance is an inexpensive form of protection for your business, critical illness being statistically more likely to occur is the more expensive element.

For this reason many companies compromise on the level of critical illness cover in order to make premiums more affordable, for example you may decide to cover 5x net profit for life insurance, but only 2x net profit for critical illness dramatically reducing the premiums.

The best keyman insurance providers

These are the UK's top providers of keyman insurance in no particular order:

With so many providers in the market, finding the right one for your company can be difficult, which is why we always recommend requesting a comparison quote through Business Protection Hub.

best keyman insurance providers

Other Types of Business Protection

There are various other types of business protection insurance that work alongside keyman insurance protection insurance. Click a link below to learn more or to request quotes:

About Business Protection Hub

Business Protection Hub is a free information and comparison service, helping busy company owners navigate the world of protection insurance. We aim to save you time and money and to further that aim, we partner with the 5* rated advisers of Sandbourne Ltd., who are authorised and regulated by the FCA.

Excellent in all respects. Friendly, efficient and clearly explained everything. Would highly recommend.”
Lauren C
Trustpilot stars
on Trustpilot

Keyman Insurance FAQ