Key Person Life Cover
Pays a lump sum to the business on the death of the key individual during the policy term. The most fundamental form of key person protection.
Key person insurance is taken out by a business on an individual whose loss would cause significant financial harm, covering lost revenue, recruitment costs, and business disruption if a key employee dies or becomes critically ill.
Important: The tax treatment of key person insurance premiums and policy proceeds depends on the purpose of the cover and the individual circumstances of the business. Always seek independent advice from a qualified tax consultant before proceeding.
Key person insurance is a relatively straightforward product structure, but the correct setup is important for it to perform as intended. Not sure what you need? Take our free 2-minute protection review.
The company (or partnership) is both the policy owner and the beneficiary. The business takes out the policy on the key individual's life, not the individual themselves.
The company pays the monthly premiums out of company funds. The tax treatment of these premiums, whether they are deductible or not, depends on the purpose of the cover.
On a valid claim, the sum assured is paid to the company. The business then uses the funds to manage the financial impact of losing that individual.
The key person is the individual whose death or critical illness triggers the claim. They are the insured life, not the policyholder.
The payout from a key person policy is unrestricted, but there are common and well-understood uses that justify taking out the cover in the first place.
Finding, hiring and training a replacement for a key individual can be expensive and time-consuming. The insurance proceeds can fund this process without disrupting the business's cash flow.
Key individuals often drive a disproportionate share of a business's revenue. The sum assured can be calibrated to reflect the estimated profit impact of their absence over a recovery period.
If the key person provided a personal guarantee on a business loan, their death or serious illness could trigger repayment demands. The payout can be used to retire these obligations.
Having key person insurance in place demonstrates to investors, lenders and suppliers that the business has planned for continuity, reducing concern about the impact of losing an individual.
We work with specialist business protection insurers to find the right structure for your business.
Pays a lump sum to the business on the death of the key individual during the policy term. The most fundamental form of key person protection.
Pays a lump sum if the key individual is diagnosed with a specified critical illness. Addresses the scenario where the key person survives but is unable to continue working.
Combines life cover and critical illness cover on a single policy. Pays out on whichever occurs first, death or a qualifying critical illness diagnosis. Comprehensive single-policy protection.
Specifically designed to protect businesses against the financial impact of losing a company director. Commonly arranged alongside shareholder protection for a comprehensive package.
For businesses where a key individual drives a significant proportion of revenue through client relationships and sales activity. Sum assured reflects projected revenue impact.
For businesses where a key individual possesses specialist skills, qualifications, or knowledge that would be extremely difficult or expensive to replace, such as a lead engineer or specialist consultant.
A key person is any individual whose loss would have a significant financial impact on the business. This typically includes founders, directors, top sales performers, and individuals with specialist technical skills or client relationships. The key test is: would the business's profit, revenue or continuity be significantly harmed if this person died or became seriously ill? If yes, they are a key person.
The sum assured should reflect the estimated financial impact of losing the key person. Common approaches include a multiple of their salary or the revenue they generate, the cost of recruiting and training a replacement, or an estimate of lost profits over a recovery period. Your adviser will help you work through these calculations and recommend an appropriate sum assured.
Whether premiums are tax-deductible depends on the purpose of the cover and HMRC's view of that purpose. Cover taken out to protect profits may be treated differently from cover taken out to repay a debt. This is a complex area and professional tax advice should be sought before arranging a policy. Your adviser will explain the key considerations.
The tax treatment of the proceeds is linked to the tax treatment of the premiums. If the premiums are treated as a deductible business expense, the proceeds may be taxable as trading receipts. If the premiums are not deducted, the proceeds may be received tax-free. This is a grey area and the position should be confirmed with a tax adviser before taking out a policy.
The policy term should reflect the period during which the individual is critical to the business. This may be until a planned retirement date, until a succession plan is in place, or until the business is no longer dependent on that individual. It is worth reviewing key person policies regularly to ensure the sum assured and term remain appropriate as the business evolves.
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