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What is keyman insurance? – Forbes Advisor UK

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Keyman (or ‘keyperson’) insurance is designed to protect your business against the impact of critical illness, terminal illness, or death of your most crucial – or ‘key’ – employees.

The purpose of keyman cover is to help a business survive despite the loss of one of its important people, with the definition of ‘key’ being whether the person’s absence would cause major financial harm to the company. 

A business might buy keyman insurance for its CEO, best salesperson or an employee with specialist skills and knowledge.

If the person named on the keyman insurance policy were to become ill or die, the insurance pay-out would help protect the business from the financial repercussions. 

Some businesses will only have one keyperson, while others might have several. 

What is keyperson cover?

As a business, your employees are one of your biggest assets. If you were suddenly to lose an integral member of your team, the financial consequences for your company could be severe.

Keyperson insurance can be taken out by a:

  • limited company
  • partnership
  • limited liability partnership.

Keyman insurance is designed to pay a regular payment or a lump sum that can be used to cover things such as:

  • a reduction in profits
  • loan repayments 
  • replacement staff.

What’s the difference between keyperson and life insurance?

Keyperson insurance is taken out by companies, not individuals.

With life insurance, critical illness or income protection cover, the benefits from the policy are paid out to the person named on the policy or their spouse/family in the event of their death – known as the beneficiary.

In comparison, pay-outs from a keyperson policy are paid to the company they own or work for. This type of cover is designed to protect business, not personal, finances.

Is keyperson insurance different to business insurance?

You might already have insurance for your business. Business insurance tends to cover things like burglary, business interruption, public liability, employee liability and professional indemnity cover. 

But ‘business insurance’ normally won’t cover your business losing its key person or key people. So that’s why you might need to consider separate keyperson insurance. 

Who is a keyperson?

It’s up to the business to decide and designate who the key people are that need to be covered. Essentially, if their prolonged or permanent absence would affect the operation of the business, the person can be covered by keyperson insurance.

A keyperson might be:

  • the CEO or chief technical officer
  • a financial director or marketing director
  • someone with a financial stake in the business
  • a top salesperson
  • someone with specialist IT knowledge
  • a staff member critical to maintaining goodwill or relationships with clients
  • a person integral to the image of the business.

How much keyperson cover does my business need?

How much cover your business needs depends on the individual circumstances of the business and the exact role of the keyperson. 

When deciding how much cover you buy, you should consider:

  • what the impact of the person’s loss would be
  • what you would need to do to continue as a business as a result of the loss
  • whether the person is revenue-producing and how much of the business’ income the person accounts for
  • if the person is non-revenue producing, what their role is in the business
  • the cost of recruiting to replace the person.

If the keyperson is revenue-generating, the amount of cover needed is calculated using profit multiples. If the person would need to be replaced, salary multiples are used instead.

How much does keyperson insurance cost?

The cost of a keyman or keyperson insurance policy varies depending on a number of factors, including the:

  • insurance provider
  • age of the key person to be insured
  • pre-existing conditions and smoker status of the key people covered
  • level of cover
  • policy length
  • whether the policy just covers life insurance or includes critical illness.

According to Drewberry Insurance, an insurance broker, a business would pay about £72 a month for £150,000 of combined life insurance and critical illness cover for a 45-year-old company director in good health, for a policy lasting 10 years.

Is keyperson insurance tax deductible?

Keyperson cover and tax is quite a complicated area. Whether your company’s keyperson insurance is tax deductible depends on the specific way the business would use the money if there were a claim. 

In general, if any payout would be ‘wholly and exclusively for the purposes of the company’s trade’, the premiums would usually be a tax-deductible business expense against your corporation tax bill. 

But the tax situation might be different if any payout would benefit shareholders. 

Guidance from HMRC on the tax situation is confusing so it can be a good idea to get professional advice on this issue.

How can my business buy keyperson insurance?

Most major insurers such as Aegon, AIG, Aviva, Legal & General, Royal London, Vitality, and Zurich, sell keyperson insurance. 

As always, it’s best to shop around for cover to find the best deal for your business. A professional advisor or broker can help you find the right policy. 


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