There is plenty you can do to protect employees in the workplace, but could the loss of a key staff member or director impact your business's financial success? That is where keyman insurance as it was known and now referred to as keyperson insurance, kicks in.
In this article, I explain how keyman insurance or indeed key woman insurance works, the tax implications as well as how much it costs. More importantly, I explain how I sourced the best deal and advice for Money to the Masses as a company, when we decided to put keyperson cover in place for key employees. Using this link you can jump straight to the section covering the latter if you wish - Compare keyman insurance quotes - securing the best cover for your business.
1 minute summary - Keyman insurance - how much it costs and who should get it
- A key staff member is typically defined as someone who is crucial to the financial success of a company.
- The payout from Keyman insurance can be used to cover the costs of finding a replacement or to replace lost profits if a key employee dies.
- Keyman insurance starts from as little as £5 per month.
- The tax treatment of keyman insurance premiums and payouts can be complex so it is best to get advice when buying a policy.
- The easiest way to get the best keyman insurance policy for your business is to complete this simple form*. You'll get free advice from an independent business keyperson insurance expert as well as up to & get up to £100 cashback when you purchase a policy.
What is keyman insurance?
Everyone is used to health and safety at work. There are plenty of warning signs that tell you to look out for hazards, cones warning you if the floor is wet and easy access to first aid boxes in the office. A business can’t survive without its staff, but there are extra measures that can be taken beyond health and safety.
Research by Legal & General claims almost half of businesses would fail if a key person in the company dies or becomes critically ill. There is no warning sign you can put up for that, but a firm could set up a form of business protection called keyman insurance (also known as key person insurance or cover). This type of policy means the business insures any potential lost profits, loan repayments or the cost of replacing a key member of staff or director who is crucial to their operation. This could be someone who is key to project development or who acquires new customers and has an ongoing relationship with them.
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What does keyman insurance cover?
A key staff member is typically defined as someone crucial to the financial success of a company. This can be hard to define, but it could be the business owner or founder; someone who sets the company strategy, or even the top salesman or someone with niche but crucial skills. Like a life insurance policy, keyman insurance will pay out a lump sum of money equal to the level of cover if any of the insured key people in your business were to pass away. Terminal illness is almost always covered as well so that if the insured person becomes terminally ill with less than 12 months to live, the policy will pay the death benefit early giving further protection to the business. The payout is then used to cover the costs of finding a replacement or to replace the loss of profits and revenue.
You may also be required to take out key-person protection as a form of business loan protection when getting a bank loan. This gives a lender reassurance as the keyman insurance will cover repayment of the debt if a person who is deemed crucial to the firm is no longer around.
Key person insurance doesn’t just have to cover the death of a crucial staff member or director. It can also provide a payout if an eligible critical illness or long-term disability means an important person can no longer work. Critical illness cover can be arranged as part of life insurance or separately to provide a payment to the business in the event that a member of staff who is covered by this insurance is diagnosed with a critical illness that is listed within the policy conditions. There is also a keyman income protection insurance option that will help fund the salary and temporary replacement of a key employee who is unable to work due to ill health or injury. In the case of critical illness, long-term disability, and income protection, insurers may have exemptions so you would need to check what the policy actually covers before taking it out.
How does keyman insurance work?
If you have taken out life cover for yourself, you will already be familiar with how keyman insurance works. The premium for key worker protection is calculated based on age, health and lifestyle, but it is actually the business, rather than the individual insured, that pays the premiums. Additionally, the business is the keyman insurance beneficiary, so it will receive any payout.
The policy's price will depend on how long it is taken out for (the term) and the level of cover. The amount of protection taken is usually calculated by either a multiple of the person’s salary or how much profit or turnover they create and how long it could take to recover. Alternatively, some businesses may look at the direct costs of a replacement such as finding new staff, paying a salary and how long it would take to replace the lost revenue.
It can be extremely helpful to discuss your business needs with a business insurance expert* who will take the time to understand what you need and then source the best types of business insurance including keyperson insurance completely free of charge.
Is keyman insurance tax deductible?
Keyman insurance costs can be tax deductible but this is dependent on the rules laid out by HMRC. Similar to any expenses, one of the most common questions businesses ask is whether keyman life insurance is tax-deductible. The broad principles on whether an employer can deduct keyman insurance premiums are more than 70 years old, having been outlined in 1944 by the then chancellor Sir John Anderson. He pointed out that all cases will be different but said the sole relationship between the business and the key person must be that of an employer and employee.
A shareholder can be covered, but the premium can only be claimed as an expense if they don’t have a “significant” holding. This is typically deemed at less than 5% but may be open to interpretation by the taxman. Additionally, the plan can only be tax deductible if it is used to cover lost profits and must be a form of term insurance covering someone only while working at the business rather than a whole of life policy. This means the keyman insurance premium is not tax-deductible if it is covering other aspects such as a business loan.
Tax treatment of a keyman insurance policy payout can also be unclear. Generally, if you got the tax relief on the premiums then the payout will be taxed as it will be used to boost your business profits, ultimately pushing up your corporation tax liability. If the business didn’t get the relief on premiums, then it is likely that the payout will be treated as capital rather than profit in the business, so won’t be taxable. As usual everything is down to HMRC’s own interpretation so it is best to check with HMRC or an accountant.
When should you consider keyman insurance?
Keyman insurance benefits the whole firm as it provides continuity. There are plenty of times to consider keyman insurance. It is important when starting out as your firm may rely on a key group of talented individuals to help it grow, or more established firms may need staff with a particular skill set. Staff are the greatest asset a business has. Losing a key person in a firm may not just hit profits but could also cause uncertainty and make others want to leave.
Small businesses, in particular, may have an influential founder whose departure could mean a loss of ideas and leadership, while firms of all sizes may have a salesperson responsible for bringing in most profit or someone with extra technical skills that can’t be easily replaced. Ultimately, keyman insurance helps alleviate periods of uncertainty and ensures a business can continue to operate both financially and culturally even if it loses one of its key employees. For many, that should be in the business plan from day one.
How much keyman insurance do you need?
Every business is different and so there is no hard and fast rule. That said, there is a general rule which can be followed to ensure that your business has the minimum amount of protection against the loss of a key staff member. Firstly, identify which key individuals you want to insure. Then, work out their value to your business. To do this, you should try and identify the portion of either net or gross profits that the key person is directly responsible for.
Once you have done that, you should consider insuring them for at least 2 x the amount of gross profit that they bring in or 5 x net profit. We have provided two useful tables below
How much keyman insurance you need based on the percentage of gross profit they generate or influence
| Gross profits of £25,000 | Gross profits of £50,000 | Gross profits of £100,000 | Gross profits of £250,000 | Gross profits of £1,000,000 | |
| Responsible for 10% | £5,000 | £10,000 | £20,000 | £50,000 | £200,000 |
| Responsible for 20% | £10,000 | £20,000 | £40,000 | £100,000 | £400,000 |
| Responsible for 30% | £15,000 | £30,000 | £60,000 | £150,000 | £600,000 |
| Responsible for 40% | £20,000 | £40,000 | £80,000 | £200,000 | £800,000 |
| Responsible for 50% | £25,000 | £50,000 | £100,000 | £250,000 | £1,000,000 |
| Responsible for 60% | £30,000 | £60,000 | £120,000 | £300,000 | £1,200,000 |
| Responsible for 70% | £35,000 | £70,000 | £140,000 | £350,000 | £1,400,000 |
| Responsible for 80% | £40,000 | £80,000 | £160,000 | £400,000 | £1,600,000 |
| Responsible for 90% | £45,000 | £90,000 | £180,000 | £450,000 | £1,800,000 |
| Responsible for 100% | £50,000 | £100,000 | £200,000 | £500,000 | £2,000,000 |
As you can see from the table above, as a rough guide, you should consider insuring a key person in your business for roughly 2 x the amount of gross profit that they are personally responsible for. So if we look at the table above, if an individual is responsible for 50% of a business that generates gross profits of £100,000, then they should be insured for at least £100,000. Remember, this is just a guide and it would be sensible to seek advice. We explain more about getting advice later in this article.
How much keyman insurance you need based on the percentage of net profit they generate or influence
| Net profits of £25,000 | Net profits of £50,000 | Net profits of £100,000 | Net profits of £250,000 | Net profits of £1,000,000 | |
| Responsible for 10% | £12,500 | £25,000 | £50,000 | £125,000 | £500,000 |
| Responsible for 20% | £25,000 | £50,000 | £100,000 | £250,000 | £1,000,000 |
| Responsible for 30% | £37,500 | £75,000 | £150,000 | £375,000 | £1,500,000 |
| Responsible for 40% | £50,000 | £100,000 | £200,000 | £500,000 | £2,000,000 |
| Responsible for 50% | £62,500 | £125,000 | £250,000 | £625,000 | £2,500,000 |
| Responsible for 60% | £75,000 | £150,000 | £300,000 | £750,000 | £3,000,000 |
| Responsible for 70% | £87,500 | £175,000 | £350,000 | £875,000 | £3,500,000 |
| Responsible for 80% | £100,000 | £200,000 | £400,000 | £1,000,000 | £4,000,000 |
Again, as you can see from the table above, as a rough guide, you should consider insuring a key person in your business for roughly 5 x the amount of net profit that they are personally responsible for. So if we look at the table above, if an individual is responsible for 50% of a business that generates net profits of £100,000, then they should be insured for at least £250,000. Again, this is just a guide and we would recommend that you seek advice. See below for further details.
How much does keyman insurance cost?
The cost of keyman insurance will vary across different insurance companies. The amount your business pays in keyman insurance premiums will depend, similar to life insurance, on the person being insured as well as the level of cover or benefits. You will need to work out the likely loss of profits; how much it will cost to find a replacement and any other potential losses to the business.
The monthly or annual premium for keyman life insurance is worked out using:
- The sum assured – the amount of money the insurance will pay if the key person dies, a cash lump sum or a regular income
- The term – the number of years the insurance will provide cover
- Age – the key person's age
- Smoker status – a non-smoker is someone who has not used any nicotine or tobacco products for at least 12 months
- Health – the key person's own and immediate family history of health
- Occupation – any risks associated with a person's job
- Lifestyle – hobbies, pursuits, travel as well as things like alcohol consumption
The more cover you have, the more it will cost. If the key person within your business leaves the business, the insurance is not usually transferable to another key person as they will have to be assessed through an application. The person leaving can take the cover with them if they choose to take over payments for it or it can simply be cancelled and replaced.
Monthly premium for £100,000 keyman insurance over 10 years
| Age | Monthly premium for £100,000 keyman life insurance for a non-smoker | Monthly premium for £100,000 keyman life insurance for a smoker |
| 30 years old | £5.00 | £6.00 |
| 40 years old | £6.29 | £11.29 |
| 50 years old | £13.38 | £28.12 |
| 60 years old | £32.87 | £75.23 |
| 70 years old | £90.13 | £223.52 |
All prices are correct as of 18th September 2024 and assume that the insured person is in good health and takes no extra lifestyle risks
How to minimise the cost of keyman insurance
Businesses tend to buy renewable policies that renew every 5 or 10 years instead of buying long term policies. This keeps the life insurance costs down as the price increases with a longer number of years. The renewable option means if you get to the end of the 5 years, the keyman insurance can be renewed easily without having to go through medical questions again – this prevents any health issues affecting your ability to continue the insurance. If your business needs change and you no longer need to insure this person then you won't have overspent on the insurance. Businesses have a variety of different factors to consider and this solution may not suit all, so we recommend you speak to an independent life insurance expert who will be able to provide guidance based on your specific requirements.
There are lots of factors to think about when finding the right keyman insurance such as knowing who to cover, how much and for how long, and that is even before you consider the tax liability. As with any financial product, keyman insurance providers will have a variety of rates. It is therefore important to shop around for a keyman insurance quote.
Compare keyman insurance quotes – securing the best cover for your business
It's important to speak to a competent business protection specialist to find the most suitable keyman insurance policy for you and your company. MoneytotheMasses has vetted the service of an independent protection specialist that provides excellent service.
As I mentioned at the start of this article we put in place keyman insurance for key employees at Money to the Masses. After vetting the level of service and expertise provided, I would recommend that you speak to LifeSearch* whom I trusted to put in place insurance policies not only protect my business and employees but also my family. LifeSearch* enjoys preferential terms from insurance companies, across the whole market, due to its size and so can guarantee to beat any quote.
More importantly, as LifeSearch is independent, it can offer a tailored service and make recommendations based on your own circumstances, even if that is to say that you do not need keyman insurance to protect your business. Just fill in the form, via the link above, and they will be in touch to help. There is no obligation at all on your part. However, if you do decide to take out a policy you will also receive up to £100 cashback.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article – LifeSearch
