COVERLIFE SERVICES
Keyman Insurance
Protect your business from the financial impact of losing a key member of staff.
This Protects The Business, Not The Family
Keyman insurance is owned by the company, paid for by the company, and pays out to the company. It exists to put money into the business when the person the profits depend on dies or becomes critically ill, so the company can survive the gap, recruit a replacement and reassure its bank and its customers.
That is the opposite of a relevant life policy, which the company also pays for but which pays the employee's family. Confusing the two is the most common and most expensive mistake in this corner of the market, because each solves a problem the other does not touch.
Why Do Businesses Need Keyman Insurance?
Our experts work with business owners and directors to understand the financial impact of losing key personnel. We help identify which team members are critical to your business and ensure you have the right protection in place at competitive rates.
What To Check
- •Whether the premium is deductible in your case
- •Whether the payout would be taxable
- •Profit cover and loan cover priced separately
- •That the sum assured can be justified
- •Whether critical illness should be added
- •That it is the company, not you, that owns it
What is Keyman Insurance?
Keyman Insurance (also known as Key Person Insurance) is a life insurance policy that a business takes out on a key employee, director, or partner whose knowledge, skills, or leadership is critical to the company's success. If the key person passes away or becomes critically ill, the policy provides a financial safety net to help the business recover.
The Financial Impact of Losing a Key Person
Losing a key person can create serious financial and operational challenges:
Lost Revenue
Cover lost revenue or profits during the transition period
Recruitment Costs
Fund recruitment and training of a suitable replacement
Loan Repayment
Repay outstanding business loans or overdrafts
Maintain Confidence
Maintain confidence among investors, creditors, and customers
How Does Keyman Insurance Work?
1. Policy Setup
The business takes out a policy on a key employee or director with cover tailored to their financial impact.
2. Premium Payment
The business pays premiums, ensuring protection is always in place for vital personnel.
3. Upon a Claim
If the key person passes away or becomes critically ill, a lump sum is paid directly to the business.
4. Business Protection
Funds are available immediately to cover operational costs and recruitment during the transition.
Key Benefits of Keyman Insurance
Business Continuity
Financial stability ensures your business survives the loss of a vital team member
Recruitment Support
Funds available to recruit and train a suitable replacement quickly
Stakeholder Confidence
Protects business reputation and maintains investor and client confidence
Financial Security
Covers outstanding business loans and operational expenses during transition
Protect Your Business & Key People
Don't leave your business's future to chance. With CoverLife's Keyman Insurance, you can ensure your company remains secure and your key people are protected.
The Tax Position Is Not Simple, And Anyone Who Says It Is Has Not Read It
The general rule comes from a Parliamentary statement usually called the Anderson rules, and it has three conditions. Premiums may be deductible where the insured is a pure employee rather than a substantial shareholder, the policy is short term and annually renewable, and the purpose is purely to make good a loss of trading profit.
Miss any of those and the deduction usually fails. Cover taken to repay a director's loan or to protect a bank facility is a capital purpose, not a trading one, so the premium is normally not deductible. The trade off is important: where premiums have been deducted, HMRC generally treats the payout as a taxable trading receipt. Where they have not, the proceeds are often outside the charge. Your accountant should decide which side of that line you are on before the policy is arranged, not after a claim.
How Much Cover The Business Actually Needs
Two approaches are used in practice. The profits method takes the person's contribution to gross profit and multiplies it by the number of years the business would realistically take to recover, commonly two or three. The payroll method uses a multiple of their total remuneration, which is cruder but easier to evidence.
Either way, insurers will want the figure justified rather than asserted, and large cases are financially underwritten against accounts. It is also worth separating loan cover from profit cover, because the tax treatment differs and so does the amount.
Who Counts As A Key Person
Not necessarily the founder. It is whoever the business would struggle financially without: the person holding the customer relationships, the one with the technical accreditation the company trades on, the salesperson responsible for a disproportionate share of revenue.
In a small business it is frequently more than one person, and often includes someone who is not a director. A useful test is to ask which single absence would cause a bank or a major customer to ask questions.
What It Costs
Keyman cover is priced on the individual insured, so it starts from around five pounds a month subject to their age, health and lifestyle, and rises with the sum assured. Adding critical illness increases it substantially, and for most businesses that addition is the point, because a key person surviving a serious illness but being unable to work causes the same commercial problem as losing them.
The real variable is the amount of cover rather than the rate. Getting the sum assured right, and being able to justify it, matters more than shaving pounds off the monthly figure.
Cover that often goes with this
The gaps we most often find sitting next to this one.
- Relevant life coverAlso paid for by the company, but it pays the employee's family rather than the business. Most firms need both and the tax treatment differs completely.
- Shareholder protectionKeyman covers losing the person. This covers what happens to their shares.
- Executive income protectionFor when the key person is unable to work rather than gone.
Common questions
What is keyman insurance?+
A policy the company owns and pays for, covering the life or health of someone the business depends on financially. The payout goes to the business, not the family, so it can cover lost profit, recruitment and reassure lenders while it recovers.
Is keyman insurance tax deductible?+
Sometimes, and the conditions are strict. Under what are generally called the Anderson rules, the premium may be deductible where the insured is a pure employee rather than a substantial shareholder, the policy is short term and annually renewable, and its sole purpose is to replace lost trading profit. Cover for a loan or a capital purpose usually is not deductible. Where premiums have been deducted, the payout is generally treated as a taxable trading receipt. Your accountant should confirm the position before the policy is set up.
How much keyman insurance do we need?+
Two methods are common. The profits method multiplies the person's contribution to gross profit by the years the business would take to recover, often two or three. The payroll method uses a multiple of their total remuneration. Insurers will want the figure justified, and larger cases are underwritten against accounts.
What is the difference between keyman insurance and relevant life cover?+
Who gets the money. Keyman pays the company, to cover the commercial damage of losing someone. Relevant life pays the employee's family, as a death in service benefit. The company pays for both, but they solve different problems and their tax treatment is completely different.
Can keyman insurance include critical illness?+
Yes, and for most businesses it should. A key person surviving a serious illness but being unable to work for a year creates the same commercial problem as losing them altogether. Adding it increases the premium noticeably, which is a reflection of how much more likely that claim is.
Who counts as a key person in a business?+
Whoever the business would struggle financially without, which is not always the founder. It might be the person holding the client relationships, the one carrying a technical accreditation the company trades on, or a salesperson responsible for a large share of revenue. A useful test is which single absence would prompt questions from your bank or your largest customer.
Related reading
Guides from our team on the cover discussed on this page.
How Much Life Insurance Does a Family Actually Need?Calculate your family's life insurance needs by considering your financial obligations, lifestyle, and future plans. Explore different policies suitable for various family scenarios.3 min read
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