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What is key man insurance, and do I need it for my business?

key man insurance

Key man insurance is a life insurance policy designed to protect your business against the impact of losing a vital employee. When a key employee is lost from the business it can cause a substantial impact on the business. This can include loss of sales, loss of customers, the cost of replacement, the cost of recruitment and much more.

It is likely that most businesses will contain a key person. This is especially true for smaller businesses. Therefore, if you are a director or business owner you may need to invest in key man insurance at some point.

What is key man insurance?

Key man insurance is a protection policy for your business. It consists of a life insurance policy that covers the life of a key member of staff within the company. In the event that the employee was to pass away, a lump sum is paid into the business to help protect against any costs associated with losing that key person.

Who is a key employee?

Most businesses will have at least one person that is key to the company. This can be through a contribution to sales figures and profits, particular skills or knowledge or vision and leadership. The loss of such a person can cause a major financial impact on the company. A key employee can be a company director, a sales manager, a marketing manager, software developer or systems developer.

Why do I need key man insurance for my business?

The loss of a key employee can be devastating for a business. The purpose of key man insurance is to protect the business against the cost of that impact.

When a business loses a key member of staff, there are numerous outcomes and costs that the business can face. This includes;

  • The loss of clients
  • Existing loans or debts being recalled
  • Difficulty gaining new finance or loans
  • Uncertainty amongst employees
  • Loss of reputation
  • The loss of suppliers
  • Loss of integral knowledge and skill coming into the business
  • The need for temporary replacement, recruitment and training
  • Closing down the business if there are only one or two key people in the business

With key man insurance, the payout received in the event of a claim can be used to fit the business requirements. Losing a key employee can make a big impact on the business unexpectedly. The company may not have enough capital to cover such losses. Therefore, key man insurance can help provide a financial security net to protect the business against these circumstances.


How much cover can I get?

You can take out any amount of cover when setting up a key man insurance policy. Despite this, the amount you request needs to be justified in order to set up the policy. Most companies will use a multiple of the employee’s salary or calculate how much profit they bring into the business.

Really, your business should think about how much cover you really need. There isn’t a fixed calculation to work out how much key man insurance a business needs to take out. It will depend on your company requirements and the individuals that you are insuring. Typically, people will take out double the amount of gross profit they receive or between 5 to 10 years’ worth of salary.

Why can’t I buy key man insurance online?

The cost of key man insurance is calculated based on the health and lifestyle of the individual insured along with how much cover you take out and how long the policy is written for. Getting a quote online will not always take all the right information into consideration. Each policy is assessed individually, which is why it’s not possible to buy a key man insurance policy online.

To obtain an accurate price for key man insurance, the key person will need to answer questions regarding their medical history, age, height, weight, smoking status and occupation. It is also important for your adviser to assess the level of cover that you need in order to determine if key man insurance is right for your business. It is a lot easier to do this over the phone and quicker to get the life insurance policy set up.

In some cases, during the underwriting process, a GP report may be required, or further medical checks requested. Insurance providers will use this information to assess the level of risk that you pose for them.

What information is required in order to set up the policy?

When setting up your life insurance policy, your adviser will need to know information about your health and lifestyle. This will include your age, height, weight, medical conditions, smoking status and alcohol consumption as well as any extreme sports hobbies and your occupation.

In addition to this, as key man insurance pays into the business, company information may need to be provided.

In some cases, then a medical disclosure has been made, the policy may need confirmation from your GP during the underwriting process.

How does key man insurance work?

Key man insurance works similarly to a life insurance policy. The key difference is that the policy is owned by the business and paid back into the business.

The life insured is that of the key person, but the business pays the policy premiums. If the person insured passes away or suffers from a terminal illness, then the business can make a claim. The business then receives the funds, which they can use to limit the financial impact of the loss.

What are the tax implications of key man insurance?

As key man insurance is paid for by the business it may be eligible for tax relief. However, the tax treatment of key man insurance is determined by each individual policy. The tax office will also take into account how the money is spent. Key man insurance tax is different for shareholders, employees and sole traders. It is always recommended to check your situation with a financial adviser or tax adviser when it comes to taxation on business life insurance.

Can sole traders get key man insurance?

 Sole traders are eligible to receive key man insurance. However, because they themselves are seen as the business entity, the tax policy is different. In this circumstance, it is unlikely that key man insurance can be run through as a business expense and offset against corporation tax. Instead, the policy pay-out may be tax-free instead.

As a sole trader is the only key member involved in the business, key man insurance is strongly recommended. Without that individual, the business may need to close down, and any outstanding loans and debts will fall into the estate. Key man insurance can counteract this and help to pay off business loans as well as facilitating the closure of the business. 

How much does key man insurance cost?

The cost of key man insurance is dependent on the individual you are wishing to insure, how much cover you require and how long you are taking the policy out for. The insurance provider will look at your age, medical history, smoking status, height and weight in order to determine the level of risk and therefore how much your premiums will be.

The older you are, the more expensive life insurance becomes. In addition to this, smokers will look at paying more as well as those who have suffered from serious illness such as heart disease, diabetes or a stroke.  It is important to disclose any medical conditions during the application process. If an illness is discovered after the policy is taken out, it can result in a denial of payment on the claim. Underwriters can request confirmation from your GP too.

How long should I take key man insurance out for?

When you apply for key man life insurance, you will need to determine how long you would like the policy for. You can take key man insurance out for a minimum of 5 years, but you can get cover for longer periods.

Life insurance can be cheaper if you take it out for a shorter term. However, if you need a new policy after the term ends, it can be a lot more costly. Life insurance gets more expensive the older you are, and you are more likely to become ill during this time. It is recommended to take out life insurance in conjunction with your business requirements. Policies may need to be reviewed as your business requirements change.

Get the right advice on your key man insurance

In order to obtain the right policy for your individual needs, it may be easier to use an insurance brokerage. They will have qualified insurance advisors who can help you find a policy to suit you. We can compare a panel of selected UK insurance companies chosen for their product proposition, service and claims history to find the right policy to suit you. Getting life insurance through this way can also help to determine whether key man insurance is right for you as well as determining a suitable amount and timescale for your policy.


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