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What is Key Man Insurance?

Key Man Insurance helps safeguard a business against the financial effects of a critical illness, a terminal illness or from the death of one of the businesses key people. A ‘Key Man’ is an employee whose death or continued absence would affect the profits and the running of the business.

The loss of an integral employee or director may result in: reduced sales, a loss of profits/turnover, wasted time, recruitment costs, the disruption of development plans and increased workloads for the remaining staff. Keyman Insurance is a life insurance policy, which can have critical illness added. It is written on the life of a key business employee, but it is owned by the business. If something should happen to that person, the policy is paid out directly to the business, for this reason the business pays the premiums.

Find out more about how Key Man Insurance is treated as a tax deductible business expense.

Who is a Key Man?

Key people are individuals whose skills, knowledge, experience or leadership are important to a business’ continued financial success. Examples of a key individual include, but are not limited to: sales directors, IT specialist, managing directors and heads of product development.

Frequently Asked Key Man Insurance Questions

We have listed some of the most frequently asked questions here, but alternatively if you would like more information please drop us a message.

What is Key Man Insurance? »

Keyman or key person insurance is an insurance policy on a businesses key individual, or main profit maker, taken out by the company. It is put in place to protect the company, in most cases the insured person is worth a substantial amount in profits, or has knowledge vital to the business or companies success. If the insured individual become critically ill or dies, a large sum of money is then paid to the company.

Who can take out a Keyman policy?»

A Keyman Policy can be taken out by a ltd company, or by sole traders as a “life of another” policy, however in this case the person taking out the insurance must have a financial association with the life being insured.

Is the Key Man Insurance policy owned by the business?»

Yes. The policy is taken out by the business to cover the life of an employee and so is owned by the business. The business is the beneficiary of any claim which is made, however the pay out amount can be used for any reason. This can include payment of staff or covering any profits which may be lost.

Can you change who owns the policy?»

Yes, you can change who owns the insurance policy through a “deed of ownership”, however these must be written through a solicitor. You may need to change the owner of the policy if your company ceases trading or if it changes name. There is also the option of transfer the policy to a personal cover although this happen very rarely.

How much does Key Man Insurance cost?»

The cost is dependant on the life assured age, smoker status amount of cover and term. Once a policy is submitted to the underwriter it can be either accepted on standard rates, loaded, with an exclusion, postponed or declined. So you will not know the exact price of the policy until you have terms issued.

What are exclusions and underwriters?»

An underwriter works for the insurance provider, they look at your details, family history and health issues and attribute you a risk factor based on how likely you are to develop certain illnesses. If you are seen as high risk they can increase your insurance premiums. They may also add an exclusion. An exclusion is when the policy includes a clause not to cover the policy holder for a certain condition, this normally applies to Critical Illness Cover. For example someone may be excluded for cancer if they have previously had any form of cancer. Policies can also occasionally be postponed if the underwriter wants to wait for further evidence or for cool off periods since a previous health issue.

How long can it take to set up a Keyman Insurance policy?»

This can vary from same day to a few weeks. Once you have decided to go ahead the Keyman Cover application only takes around 15 minutes, the application is then submitted to the underwriter which can be accepted instantly. If you are happy with the terms offered we can start the policy. If the underwriter wants further evidence, such as a copy of your GP report it will take longer. GP’s have been known to take months to return a report, but in most cases its just a few weeks. Once the underwriter has all the information needed its normally only takes about 48 hours to get an underwriting decision.

Does my company have to be based in the UK to be able take out Key Person cover?»

This is dependant on the policy provider. In most cases the owner of the policy has to be a UK company, and the lives of the insured have to reside in the UK for a minimum of 6 months in a year.

Can a Limited Liability Partnership have a Key Person Insurance policy?»

Yes limited liability partnerships and limited companies are both able to take out Keyman insurance, they both handled in the same way.

How much should I insure a key person for?»

This is dependant on the company and the reason for insuring that individual. It can be to cover a loan or investment amount, or it can be dependant on working out the worth of the person to the company. Think about loss of profits, cost of replacement and debts that would need to be covered to keep the company running without that person.

Is Key Man Insurance a tax deductible expense?»

Yes it can be a deductible expense however this is dependant on a range of factors including current tax legislation along with the reason for insurance and the amount the cover is for. Please take a look at our page on key man insurance taxation for further details on this.

HM Revenue and Custom practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

How long should we insure our key person for?»

This really depends on how long you think you will need the policy. If you believe the person you are insuring will be at your company for 10 years, and will continue to be a valuable asset then you should take out a 10 year guaranteed premium. Taking out a shorter premium may mean having to renew the policy, this can cause additional expense, as the person being insured will be older and may have suffered medical issues. Taking out a longer term premium guarantees the lower rate. You can cancel these policies at anytime without penalty so there is no risk of taking of being stuck with a policy if that person leaves the company.

Can critical illness cover be added to a Key Man Insurance policy?»

Yes critical illness can be added to any Key Man Insurance policy. Any premium on a successful claim and will be paid to the company, and the company will be the owner of the policy.

Is a medical essential?»

This depends on a number of factors including age, the amount of cover you would like and past health. Sometimes a medical is triggered when the amount is above £500,000 but this is not always the case.

Can a medical be carried out at home?»

Yes in some cases this is possible. We always try and make sure the medical is arranged to your convenience however its not always possible to have the medical at home.

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