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Insurance?A Key Person Insurance policy is taken out by a business to insure the most valuable members of staff.
Key man insurance (key person insurance) is designed to protect the business from the financial impacts of losing their key people through death or terminal illness. It’s essentially a life plan set up with a company as the owner and as the beneficiary.
Key man life insurance can also be taken out with critical illness cover included. The benefit is a tax-free lump sum which is paid to the company in the event of a claim. The cover is taken out over a term, normally a 5-year or 10-year guaranteed premium depending on how long you think it’s needed.
All policies can be cancelled at any time, you are not tied in.
According to statistics, only 28% of UK businesses established in the last two years have any kind of business protection in place. Yet 46% would cease trading immediately if a key person died.
OnlinePerson Insurance?Your company could have various workers essential to profits. A key person is not always the top salesperson or “breadwinner”.
A key person could be the brains behind the operation. Maybe someone who knows the design mechanics or engineering details of the main product. Maybe the creator of the intellectual property, the invention, discovery or design. Many of the key people we insure will be directors and managers. But as far as the underwriter is concerned, as long as there is an insurable interest, it’s reasonable for that key person to be considered. What would your company do if you lost your most important key person?
Is there anything more important when protecting your business than the people?
Companies will always make sure they insure expensive machinery and other company assets. Therefore wouldn’t it be wise to insure your most valuable assets, the key people?
Insurance?Key man insurance rates are based on each individual life assured. It’s calculated much like normal term life insurance.
The monthly premiums will depend on how old the person is if they smoke, the amount of coverage and the term. All quotes are subject to underwriting which means premiums could go up before terms are issued.
Any increase in premiums could be down to several things. Previous medical history can cause an increase, but often it’s down to a high BMI (Body Mass Index) or raised blood pressure. Taking part in a hazardous leisure activity or dangerous duties at work can also have an effect.
There is almost always someone within the business that is very important. Is there someone in the company with all the contacts and years of built-up relationships? Who is the face of the company or the personality that everyone knows and trusts? Is there a specific person with “the brains” behind the whole project? What about the project manager overseeing your next big investment?
If one of the above relates to your company, then you need to think seriously about key person insurance and what would happen in the event of their death or illness.
Insurance Do I Need?The amount of cover you need for key person cover is down to the individual business. For example, if that person brings £100,000 per year to the company then maybe that’s the sum assured needed.
Most of the time a business owner will look at the turnover of the company and work out a percentage that the key person brings to the company, then insure for that amount. But it’s worth thinking things through a little more. You can use our key man insurance calculator to work out how much cover you may need.
Losing a key member of staff can have many detrimental effects on the company. Customers will still expect contracts to be honoured and their confidence in your business will need to be maintained. So all things considered, a financial injection from a policy payout can help enormously. It can give the company breathing space for contingency planning and working out what to do next.
In most cases key person insurance will be treated as a business expense and is therefore tax deductible.
The two most common questions we are asked regarding Key Man insurance tax treatment are:
For most people, the above will suffice. If you want to know more regarding how HMRC treat Keyman insurance then please visit our in-depth guide.
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FAQAll you need to know and more.
If a policy is being set up to cover a loan, the lender will often ask that the policy be assigned. This will mean that in the event of a claim, the money will be paid directly to the assignees. The bank or lender should be able to provide you with the assignment documentation. The company or employer will still be the legal owner of the policy.
Life Only Key Person Cover
A life-only policy is much like straightforward cheap life insurance. A person is insured for a sum of money which is paid out on death. The only variation from different providers will be whether the terminal illness is normally always included. Life Only can be taken out with a level term or decreasing sum assured.
Life & Critical Illness
Critical illness cover can be bolted onto the key man cover or taken out on its own. A life and critical illness keyman cover will pay out a lump sum on diagnosis of a critical illness as set in the definitions of the policy. Over 70% of claims are for heart attack, stroke and cancer. Critical illnesses covered will vary between providers, but most will abide by the rules set out by the ABI.
Key Man Income Protection
Keyman income protection is another option which can sometimes be more suitable. It will pay out a monthly income to the company if the life assured is unable to work. This could be due to sickness or injury.
Income protection policies are normally taken out on a shorter term, and the benefit pay-out is normally limited to 12 to 24 months. There is also a set deferred period of no less than 4 weeks, which means the key person would need to be off work for at least 4 weeks before the benefit would start to pay out. You will need to have more than 2 employees and the life assured can not be liable for more than 70% of company profits.
This depends on age, health and sum assured. Policies over £500,000 normally always require a medical no matter what provider is used.
Yes, critical illness cover can be added to any key person protection policy. This is something we advise doing. Any payout will be paid to the company in the event of a successful claim.
Yes, we can arrange a policy to pay out monthly amounts. You may even be more suited to a key man income protection policy.
It depends on how long you think you will need the policy. If you believe the person you are insuring will be at your company for 10 years, you should take out a 10-year policy. A 5-year policy will be cheaper in the short term but will need to be renewed if the person is still at the company. Key man insurance rates will be higher when taken out older, so securing a premium for a longer term will always be the best advice.
You can cancel key man cover without penalty so there is no risk of being tied into a policy you no longer need it.
Keyman person cover is normally taken out by a ltd company. However, sole traders can take it out as a “life of another” policy. The company or person taking out the insurance must have a financial association with the life assured.
The company owns the policy and is the beneficiary of any claim. This is different to Relevant Life Insurance where the business will be the owner but not the beneficiary. You can read more about Relevant Life Insurance here.
You can change the owner of the policy through a “deed of ownership”. These are not provided by the providers and would have to be written up through a solicitor. You may need to change the owner of the policy if your company ceases trading, or you leave and want to transfer the policy to a personal cover.
When a policy is issued at standard rates, the price remains the same as the quote. A loaded premium is when the underwriter sees fit to increase the premium due to possible health issues or something else that has come to light since the original application.
A critical illness exclusion is something that can be added to the terms once offered. For example, someone may be excluded for cancer if they have previously had cancer. Policies are sometimes postponed if the underwriter wants to wait for further evidence. Or for cool-off periods since a previous health issue. In some cases, policies may be declined.
Yes, medical are quite often carried out at home. It all depends on where you live. In some areas of the country. A nurse can visit the applicant at their workplace or their home, whichever is most convenient. In other areas of the country, it’ll be necessary to visit a surgery.
Running through an application is the next step once you decide to go ahead. This entails mainly questions relating to your medical history. An application can be filled out online but is normally carried out over the phone with an advisor. The application is then submitted to underwriting who will advise on the next step. A policy can be accepted online for someone in good health. You can only start the policy once you have terms and of course only if you are happy with them.
Unfortunately, this is not always the case. There are automatic requests for further information for older age groups and higher sums assured. This can be in the form of a mini-screening or a request for medical information from the GP. Medicals can be carried out pretty quickly and back to the provider within a week. GP reports normally take longer and can take up to 3 months.
There are often more in-depth financial requests with high sum assured cases. This is normally a few extra questions relating to the last 3 years company profits and possibly income details of the life assured.
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