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What is keyman insurance and other common questions about key person cover

As a business owner, people are your biggest asset, and your biggest risk. Many business owners haven’t thought through what would happen in the event that something happens to a partner or other key person within the business. Could your business continue trading successfully if a key person died or became critically ill?

A key person insurance policy or key man insurance policy can help protect your company should the worst happen. We've identified the most common questions businesses are searching to summarise everything you might want to know.

What is a key person?

A key person or key employee is an individual whose skill, knowledge, experience or leadership contributes to the continued financial success of the business. For example:

  • Chairperson
  • Managing director
  • Marketing manager
  • Sales manager

Essentially, anyone whose death, or inability to work due to illness, could lead to a financial loss for the business through:

  • Loss of profits
  • Having to recruit or train a replacement
  • Important personal or business contracts lost due to the key person not being there to maintain a contract
  • Customers and suppliers losing confidence in the business
  • Loan repayment being called early (please note that some loans may only be granted if insurance is taken out on key people).

What is key person insurance?

Sometimes referred to as key man insurance or key woman insurance, it's a way of insuring your business against the financial loss you may suffer if a key employee dies, is diagnosed with a terminal illness, or becomes critically ill.

How much does key person or key man insurance cost?

When calculating the appropriate amount of cover you need, you should consider the effect of the loss of the key person on the business. This can include whether this would directly impact your profits, and what the cost of hiring a replacement might be. Firstly, you need to identify your business' key people. You then need to quantify each key person's contribution to your profit. Common formulas to calculate the amount of cover you need include:

  • Up to two x proportion of gross profit directly attributable to key person
  • Up to five x proportion of net profit directly attributable to key person
  • (Key person salary/total payroll for business) x gross profit x recovery period (up to a maximum of five years).

Is key man insurance tax deductible?

For companies and limited liability partnerships, if certain criteria are met the tax treatment of a key person policy should be that:

  • You can treat the premiums you pay as allowable business expenses, deductible from your company profits. This means you could reduce your Corporation Tax liability every year you have the policy.
  • However, you’ll have to account for any proceeds from the policy as a trading receipt, potentially increasing your Corporation Tax liability in the year of receipt.
  • If the criteria are not met, then premiums are not normally deductible for corporation tax purposes. Likewise, the proceeds for any claim would not be taxed as trading income.

What other insurance covers should key individuals have?

You may want to consider additional covers for your key people to provide additional benefit solutions to manage risks and show your people how much they’re valued. This includes but is not limited to:

  • Critical illness cover – provides financial support to your employees if they’re diagnosed with a specified critical illness or condition.
  • Business life insurance (or Death in Service)– a life insurance policy can give employees the security of knowing that their family will be provided for financially if they die during their time working for you.
  • Group income protection – ensure employees and their families are financially supported if they become unable to work.

Find out more about key person protection and see how you could benefit from Mercer’s dedicated team of Business Protection professionals.

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