Key Person Insurance

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As a small business owner, what would happen if you lost a key member of staff? This important type of business insurance is there to protect your company from the unexpected.

What is key person insurance?

Key person protection is a form of life cover or life and critical illness cover, designed to protect people in businesses. It is also known as keyman insurance.

It’s usually taken out by business owners on a key person or people employed in the business who are critical to your company. They don’t have to be a director or owner, but if you were to lose that person, it would have a huge impact. Key person protection mitigates against any financial loss of losing a key individual. 

How does key person protection work?

When you take out a key person policy, you name them and set a level of cover depending on your business and what you feel you would need if that person wasn’t around. 

If they were to fall ill or pass away, your business would receive a cash lump sum from your insurance company, which you can use to shore up your profits or to cover the cost of recruiting a replacement.

What’s the difference between key person insurance and life insurance?

The main difference between key person insurance and life cover is that if a key person dies, the money from the insurance policy is paid to the business. With life insurance, meanwhile, the payment goes to the family of the person who has passed away.

If you are interested in this more traditional type of life cover, you can buy Relevant Life Insurance through your business, which makes it more tax efficient. 

What does key person insurance cover cost and how much do I need?

The cost of key person insurance will depend on your specific requirements. The underwriting process and your required cover amount will ultimately determine how much you pay for key person protection.

The age and health of the person you’re insuring may affect the cost of the cover. Whether or not you include critical illness cover as well as life insurance, and the length of policy you take out are also factors that will influence the premium..

How much you need will also depend on your business and what the key person does for you. You will need to consider factors like:

  • The gross or net profit the key person brings to the business
  • The cost to find a replacement
  • Whether you would need to hire temporary staff 
  • How long the business could last with the loss of a key person 

Speak To An Expert

Whether you’re buying your first home, expanding your portfolio or looking for insurance to protect your loved ones, our friendly service and expert know-how can help ensure you get the most suitable solutions for you.

Is key person insurance tax deductible? 

The insurance costs for key person cover are typically treated as a tax-deductible expense, so they are eligible for corporation tax relief. Your business pays the premiums on a monthly or annual basis.

Are there different types of key person insurance?

There are different ways to set up your key person policy depending on the reasons why you need it. For example, if you want to protect business debt, you can set your policy up as a decreasing term. That way, the amount of cover decreases along with that business debt which makes it a cheaper policy. 

The other option is ‘level term’, which means the amount you receive stays constant. This could be more relevant if you’re looking to replace a key employee. 

You can also choose an index linked policy, which matches the Retail Price Index. That means your level of cover will increase with inflation. If you’re protecting your profits, an index linked policy is a good choice as you can be certain of covering your future costs.

How do I get key person protection?

Key person protection is not a financial services product you should buy off the shelf. The type of policy you need should match up with your business needs – so you should seek expert advice. 

As financial advisers, we will sit down with you as the business owner and drill into the needs of the business. We’ll ask you a lot of questions: who are the key people in your company and what are the profits in the business? Will you need salary replacement if somebody’s out of action for the long term? Have you got business loans that will need repayment should anything happen to your team? 

By understanding your needs we will match a policy to fit your business and budget. We’ll help you through the application process and keep in regular contact to make sure the policy is still relevant as your business grows and changes. 

Tax treatment varies according to individual circumstances and is subject to change.

Tax advice and trusts are not regulated by the Financial Conduct Authority. 

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