Key person life insurance

At the heart of a great business are great people. But, what happens if a key employee dies or becomes seriously ill?

As a business owner, it's important to consider these worst-case scenarios so you can get the right protection in place.

Discover more about key person (or keyman) insurance in this guide.

What is key person life insurance?

Simply put, it's a business protection policy.

It pays out if a key employee dies to help with the financial repercussions of this loss.

The payout could help with covering lost profits, hiring and training a new employee, or other business costs.

Who can buy key person life insurance?

Key person life insurance isn't available to everyone - you'll need to be the owner or director of a company to apply and purchase a policy.

The business buys and pays for the policy. It either protects the owner, director or a key employee.

A key employee could be:

• An employee with specialist skills
• Your top sales performer who brings in a lot of revenue
• Someone who makes important business decisions or has lots of responsibilities
• A manager (such as an operations manager, IT manager, or marketing manager)

Each business has different needs and goals, so the employee that's covered varies from company to company.

Ultimately, it's someone that's vital to the day-to-day running of the business.

What key person life insurance policy options are there?

This policy tends to be term-based. This is where an insured employee is protected for an agreed amount of time, and a payout is made if they die during this term.

Exactly what options are available depends on the insurer. Common options include:

• Level term cover - with level term life insurance, the payout amount stays the same throughout the policy term.
• Decreasing term cover - with decreasing term life insurance, the payout amount decreases throughout the policy term.

Some also offer increasing or inflation-linked cover. This is where the payout amount increases to protect the payout from inflation.

You can add critical illness cover to most key person life insurance policies. This means you can make an early claim if the insured employee falls seriously ill during the policy term.

If the employee is unable to work due to their illness, the payout can help cover lost profits (or other business costs) while they focus on their recovery.

It's important to compare multiple insurers to find the best policy option for your business.

Why is key person insurance important?

The impact of losing a key employee could be devastating to a business.

In fact, research by Vitality found that 34% of business owners have admitted that their business would fail if a key member of staff died.

Key person insurance could help keep your business afloat by helping to:

• Replace lost revenue
• Pay off business loans or debts
• Pay for the hiring and training of a new employee
• Cover business overheads like rent, bills and paying suppliers
• Pay off a business overdraft

Just as regular life insurance can be essential in protecting families, key man insurance can be essential in protecting businesses.

Some policies also have extra features that could also be a great help to businesses. For example, legal advice, tax and VAT advice, plus health and wellbeing services.

How much does key person life insurance cost?

The cost of key man insurance can vary depending on factors such as:

• The age of the key person
• The health and lifestyle of the key person (like their drinking and smoking habits, medical history, and hobbies)
• The type of cover you buy
• How much cover you buy
• How long your policy lasts for

Is key person life insurance tax deductable?

Yes, it can be seen as a business expense, making it tax deductable.

This is because the policy is bought and paid for by a business, and the business will benefit from the payout.

What's the difference between key person life insurance vs. life insurance?

The main difference is that key person life insurance covers the life of a key employee and pays out to a business. Whereas life insurance protects an individual and pays out to their family.

Both are forms of life cover, but who they protect and who they pay out to is different.

It's possible to buy both forms of cover if it's right for your needs. For example, as a business owner, you could buy key person insurance to protect your business and personal life insurance to protect your family.