What is the difference between Key man and Relevant Life Insurance?

Key man insurance and relevant life insurance are both types of life insurance, but they serve different purposes and are designed for different situations within a business context. Here are the key differences between the two:

Key Man Insurance:

  1. Purpose: Key man insurance is designed to protect a business against financial losses that may occur due to the death or disability of a key employee or leader within the company. It provides a financial safety net to help the business recover from the loss of a critical individual.

  2. Ownership: The business owns the key man insurance policy, pays the premiums, and is the beneficiary. The payout is intended to benefit the business by providing funds to cover expenses, replace the key person, or address other financial challenges.

  3. Tax Treatment: Premiums paid for key man insurance are not typically tax-deductible, and the insurance proceeds are generally subject to taxation as ordinary income when received by the business. More information on key man insurance taxation can be found here.

  4. Coverage Amount: The coverage amount is determined based on the financial impact the loss of the key person would have on the business. It is typically designed to provide financial stability during a transition period.

Relevant Life Insurance:

  1. Purpose: Relevant life insurance is a type of life insurance that provides a tax-efficient way for business owners to offer life insurance coverage to their employees, including directors and key personnel. It is often used as an employee benefit to attract and retain talent.

  2. Ownership: In relevant life insurance, the employee is typically the owner of the policy, and they pay the premiums. However, the employer can contribute to the premium payments as an employee benefit.

  3. Tax Treatment: Relevant life insurance is designed to be tax-efficient. In many jurisdictions, the premiums paid by the employee (and employer contributions, if applicable) are tax-deductible. Additionally, the insurance proceeds are often tax-free when paid to the employee’s beneficiaries.

  4. Coverage Amount: The coverage amount is determined by the employee and is typically based on their individual needs and circumstances. It can provide financial protection for the employee’s family and dependents in the event of their death.

In summary, the primary difference between key man insurance and relevant life insurance is their purpose and ownership structure. Key man insurance is focused on protecting the business from the loss of a key person and is owned and paid for by the business. Relevant life insurance, on the other hand, is a benefit provided to employees, including key personnel, and is often owned and paid for by the employees themselves, with potential employer contributions. Both types of insurance can be valuable tools within a business, depending on the specific goals and needs of the company and its employees.