Understanding the Difference Between Keyman Insurance and Life Insurance
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There are so many business insurance options that it can be overwhelming trying to choose the right ones for you, your employees and your company. Two of the most popular options are Keyman Insurance and Life Insurance. Although both types of insurance provide financial protection in the event of a team member’s death, they are designed for different situations and members of staff.
Let’s take a look at the differences between Key man Insurance vs Life Insurance, including what they cover and what type of company they’re suitable for. We’ll help you decide which type of insurance is right for you and your company based on your financial needs.
What is Key Person Insurance?
Key Person Insurance (also known as Keyman Insurance) is a type of life insurance policy that a business takes out. This type of policy is used to insure an employee or individual who is deemed critical to the company’s success. The ‘key person’ may be the company director, founder, a top salesperson or someone with a unique skillset or knowledge.
The purpose of this policy is to provide financial protection to the business if the key person passes away unexpectedly or becomes critically ill. The insurance money can help the business manage the potential financial losses or disruption to operations caused by the absence of the key person.
The business owns the policy and pays the premiums for Key Person Insurance. If the key person dies or becomes seriously ill, the business receives the insurance payout. This can be used to cover costs such as recruitment and training costs for a replacement, cost of lost profits due to the loss of the key person and ensuring the smooth running of business operations.
What is Life Insurance?
Life Insurance is a type of insurance that offers financial protection to a person’s beneficiaries should the insured person pass away or become critically ill. The money is paid out in a lump sum, which can be used to help the beneficiaries cover costs such as the mortgage (or rent), household bills and childcare.
There are various types of Life Insurance, including the following:
- Term life insurance – insures you over a pre-arranged period of time
- Whole-life insurance – insures you for your lifetime.
- Increasing-term insurance – increases your premiums each year to reflect the rise in inflation.
- Renewable term insurance – cover for a fixed amount of time, but can be extended at the end of the policy period.
- Death-in-service – company benefit, pays a lump sum to an employee’s beneficiaries should they pass away.
Relevant Life Insurance is a type of Life Insurance that is owned by the company. The insurance cover pays out a lump sum to an employee’s beneficiaries should they pass away. The company pays the premiums, which may be eligible for tax-deductions. You can use our Relevant Life Insurance calculator to help you compare the net cost of a Personal Life Insurance policy against Relevant Life Insurance.
The coverage amount is usually based on the insured person’s salary. For example, the Life Insurance may be 15x or 20x the salary, depending on the policy. Life Insurance is also typically influenced by the person’s age and health; older people tend to have higher premiums than younger people. Individuals with pre-existing health conditions (such as heart disease or a history of strokes) may also be more expensive to insure.
Some Life Insurance also includes Critical Illness cover. This type of cover will pay the employee’s beneficiaries should the individual be diagnosed with a serious illness and be unable to work.
Key Person Insurance vs Life Insurance
There are various similarities and differences between Key Person insurance vs Life Insurance, as detailed in the table shown below.
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. |
Keyman Insurance vs. Life Insurance Costs
There are various costs to consider for Key man Insurance vs Life Insurance, as shown in the table below.
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).
Should My Business Get Key Man Insurance vs Life Insurance?
Choosing between Key man Insurance vs Life Insurance depends on who needs the protection—the business or the individual. Life Insurance can be used to insure full and part-time workers at a limited company, including employees, directors and contractors. Key person Insurance is used to protect the company by insuring key members of staff to protect the business from loss of income of affected operations.
Life Insurance ensures the beneficiaries of the employee or director are financially protected should the worst happen. The policy will pay out a lump sum should the employed individual pass away or become critically ill; the money can be used to pay for anything from the mortgage to childcare.
When it comes to Life Insurance, the company doesn’t directly benefit from the policy (although the premiums may be tax-exempt). The lump sum is paid to the insured team member’s beneficiary. However, the company directly benefits from Keyman Insurance as it receives the insurance money should the key person pass away. The money can help the business get back on track by covering recruitment and training costs and cover any lost profit caused by the loss of the key person.
What’s the Cost of Not Having Key Person Insurance?
Your company faces serious financial and operational risks if it doesn’t use Key Person Insurance. If the company director, owner or another key member of staff passes away, this could lead to a disruption in operations and lost income. If the company doesn’t have Key Person Insurance, the company may struggle to recover from the loss. It could lead clients, investors and lenders to lose faith in the company, which could have a long-lasting financial impact. If the key person had personal guarantees on loans, the business might struggle to repay debts, which could potentially lead to liquidation.
If the key person has specialised skills, knowledge, or leadership, their absence could lead to slow operations or innovation within the company. The cost of hiring and training a replacement would also cost time, money and resources.
By having Key Person Insurance for your company, it will provide a financial safety net to cover lost income, debts, and hiring costs. The financial aid will help maintain client and investor confidence in the company, while ensuring the smooth transition and replacement of key personnel.
Take out Key Person Cover for your business today
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 best 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@mykeymaninsurance.com.
