11 Purdeys Way, Rochford, England, SS4 1ND
11 Purdeys Way, Rochford, England, SS4 1ND
Keyman Insurance and personal life insurance both pay out a lump sum when someone dies or becomes seriously ill. That is about as far as the similarity goes. Key Man Insurance is owned by the business, paid for by the business, and the money goes to the business. Personal life insurance is owned by the individual, paid for by the individual, and the money goes to whoever that person has named as their beneficiary. Understanding which one you need, and for what purpose, is what this guide covers.
Key Person Insurance (also called Keyman Insurance) is a life insurance policy taken out by a limited company on an individual whose loss would cause the business real financial damage. That person might be a director who brings in most of the revenue, a technical specialist whose knowledge cannot easily be replicated, or a founder whose client relationships exist because of them personally rather than the company.
The business owns the policy, pays the premiums, and receives the payout if the insured person dies or becomes critically ill during the term. That money is not earmarked for the individual or their family. It goes to the company to use however the situation demands: covering lost profits, funding recruitment and training, or servicing business loans and personal guarantees that were connected to the key person.
Whether the premiums qualify as a tax-deductible business expense depends on the Anderson Principles, the HMRC test that determines whether a business insurance policy meets the conditions for corporation tax relief. We explain this fully in our key man insurance taxation guide.
Personal life insurance is a policy taken out by an individual to provide a financial safety net for their family or dependants if they die or, in some cases, are diagnosed with a serious illness. The individual owns the policy, pays the premiums personally, and chooses who receives the payout.
There are a few main types relevant to business owners and directors:
The clearest distinction is who owns the policy and who receives the money. Key Man Insurance is owned by the company: it pays the premiums and collects the payout. Personal life insurance is owned by the individual: they pay the premiums themselves and the payout goes to their chosen beneficiaries. Everything else in the comparison follows from that.
FEATURE | KEY PERSON INSURANCE | LIFE INSURANCE |
Tax Benefits | Tax-deductible business expense if it meets the Anderson Principles. | Premiums are paid by the individual and are not tax-deductible. |
Cost | Typically lower due to tax-exemption (if applicable) | Higher due to no tax deductions. |
Coverage Amount | Based on the estimated lost profits & financial effect on business. | Dependent on personal financial situation. |
Flexibility | Less flexible, tied to the company. | More flexible, individual can choose coverage amount and terms. |
Beneficiary | Chosen by the company. | Individuals can choose the beneficiary. |
Portability | Tied to the company, isn’t transferrable with the employee | Individual owns the policy. They can keep the insurance, even if they change jobs. |
The table above shows how the tax treatment changes the real cost of each option for a limited company. Key Man Insurance premiums that qualify under the Anderson Principles can be offset against the company’s taxable profits, which reduces the effective cost significantly. The example above puts the net cost to the business at £810 per year, compared to £1,700 for the equivalent personal policy once income tax and National Insurance are factored in.
That difference is not trivial. For a policy running over several years, it adds up to a meaningful saving, and it is one of the main reasons most accountants advise limited companies to use Key Man Insurance rather than asking directors to arrange personal cover and fund it from salary.
Use our key person insurance calculator to run the numbers for your own situation.
ITEM | KEYMAN INSURANCE | PERSONAL LIFE COVER |
Annual Premium | £1,000.00 | £1,000.00 |
Gross Salary Required to Pay Premium | Company Pays Directly | £1,666.67 |
Income Tax (40%) | £0.00 | £666.67 |
National Insurance (2%) | £0.00 | £33.33 |
Corporation Tax Saving (19%) | £190.00 | £0.00 |
Total Cost to Business/Individual | £810.00 | £1,700.00 |
Net Savings | £890.00 | £0.00 |
In the example shown above, Keyman Insurance costs the company £810 annually, while Life Insurance costs the individual £1,700 annually. The business saves £890 through tax exemptions by opting for a Keyman Insurance policy.
You can use our handy Key person Insurance calculator to help you compare the potential tax savings for your company of Key man Insurance vs Life Insurance. You’ll need to input the key person’s contribution to profit, the estimated cost of replacing them and other costs (such as SIPP/SSAS Liquidity).
The question to ask is not which policy is better in general, but which one addresses the risk you are actually trying to manage.
If the risk is to the business, that is what Key Man Insurance is for. If a director, founder or specialist employee died or became critically ill tomorrow, would the company face a genuine financial problem? Lost clients, reduced revenue, an outstanding bank loan in their name? If yes, Key Man Insurance gives the business a financial cushion to deal with that.
If the risk is to the individual’s family, personal life insurance is the right tool, or for directors, a Relevant Life policy arranged through the limited company often works out considerably cheaper than a personal policy paid from net income.
In practice, many limited companies end up holding both: Key Man Insurance to protect the business, and a Relevant Life policy or personal life cover for the director personally. Use our key person insurance calculator to estimate the cover level your business might need.
Many businesses treat Key Man Insurance as an optional extra rather than a core part of their financial planning – until they lose a key person and discover the cost of not having it.
If a director or key employee dies without cover in place, the business faces the financial impact at the worst possible moment. Revenue may fall immediately. Clients may have concerns about continuity. Outstanding loans or personal guarantees do not disappear. The cost of recruiting and training a replacement falls entirely on the company at a time when cash flow is already under pressure.
Lenders, investors and key clients pay attention to whether a business has adequate protection in place. A company that loses a key person and cannot demonstrate financial resilience may find that the secondary consequences, losing confidence from outside parties, compound the original problem.
Key Man Insurance does not prevent the loss. It gives the business the financial capacity to deal with it.
Key Man Insurance is owned by the business. The company pays the premiums and receives the payout if the insured person dies or becomes critically ill. That money is used to protect the business, covering lost profits, recruitment costs or outstanding debts. Personal life insurance is owned by the individual, with any payout going to whoever they have named as their beneficiary. The two policies cover different risks and are often held alongside each other rather than as alternatives.
It can be subject to HMRC’s Anderson Principles. Broadly, premiums may be treated as an allowable business expense where the policy is taken out for trading purposes, does not extend beyond the period of risk to the business, and has no capital or investment element. Where the premiums qualify, the company can offset them against corporation tax. The full rules are covered in our key man insurance taxation guide.
The only insurance that is legally required for most limited companies with employees is employers’ liability insurance. Key Man Insurance, life insurance for company directors, and other forms of business protection insurance in the UK are not compulsory. That said, most accountants and financial advisers treat them as a standard part of any sound business protection strategy, particularly where the company depends on a small number of key individuals.
Yes. A limited company can provide life cover for its people in several ways. Key Man Insurance protects the business itself. Relevant Life Cover provides a tax-efficient death benefit for an individual employee or director, paid for by the company and written in trust for their family. Group life and death-in-service schemes cover multiple employees under a single arrangement. Which structure suits you depends on whether the priority is protecting the company, providing a benefit for your people, or both.
Premium cost depends on the insured person’s age, health and the level of cover required. For limited companies, Key Man Insurance is usually cheaper in net terms because premiums that meet the HMRC conditions can be offset against corporation tax. Our worked example shows the effective cost to the business can be roughly half what the equivalent personal policy costs an individual paying from net income.
When it comes to Key man insurance vs Life Insurance, they provide good cover for both employees and the company. While Key Person Insurance is used to protect the interests of the business, Life Insurance ensures the employee’s family have financial protection.
It couldn’t be easier to get a quote from us to find the most suitable Key Person Insurance for your company. We’ll compare deals from various insurance companies, including LV, AVIVA and Vitality. You can also ask our team about Relevant Life Insurance tax benefits and tax treatments for other types of business insurance. Reach out to us by phoning 02071128844 or by emailing info@www.mykeymaninsurance.com.
