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Keyperson Insurance FAQ’s

Updated: Dec 6, 2023

At the heart of every successful business are dedicated, talented and capable people, but none of us know what the future will bring. Key Person, Key man or Business Protection Insurance protects your business if a key employee becomes ill or dies prematurely. The company takes out the policy, pays the premiums and receives the benefits.

What type of policy is a Keyperson Insurance Policy?

There are different types of policies which can be put in place for Keyperson Insurance for example

  1. Reducing Cover Term Insurance (this will protect a business loan) A reducing cover term life insurance policy can be used to protect a business loan. The premium is fixed, but it is cheaper than standard term life insurance as the amount of cover reduces as the loan is being paid off.

  2. Level Term Life Cover – Business Profits Keyman Insurance A level term keyman insurance policy is a life policy that exists for a fixed period of time at a fixed price.

  3. Convertible Term Cover – Business Profits Keyman Insurance Convertible term is the same as a level term policy, however it includes an option to extend cover beyond the original term without further proof of health.

What is the tax treatment for Keyman Insurance?

Is Keyman Insurance Tax deductible? When looking at the tax treatment of Keyman insurance there are two elements involved

1. Corporation Tax Relief on the premiums

2. Corporation tax charged on the benefits

Premium Tax Relief

Tax relief can only be claimed on key man insurance premiums, where all 4 of the following conditions are met

  1. The Key person must own less than a 15% shareholding i.e. they cannot be a proprietary director.

  2. Key person insurance is intended for loss of profits and replacements costs, as opposed to cover against company loans.

  3. The sole relationship is employer and employee.

  4. The policy is a term assurance contract not the exceeding retirement age of the person involved.

Tax Treatment of the Benefits

Whether tax is charged on a benefit pay-out to the company, is dependent on the intention of the cover:

  • Where the keyman insurance is taken out to cover revenue loss i.e. loss of profits & replacement costs, corporation tax will apply.

  • Where the intention is to a cover capital loss e.g. loans to the company, guaranteed by the key person, then no tax would be charged

It is important to note that you can’t claim premium tax relief and also get tax-free benefits. If the cover is to protect loans then tax-free benefits will apply, but not premium tax relief. Where the cover is to protect loss of profits, then premium tax relief may apply, but not tax-free benefits. Therefore, if you need to cover both losses of profits and protect business loans, then 2 separate polices is probably the best idea.

Why should I get Key Person Insurance?

Key person insurance is something you should consider if your business relies on an individual, or individuals. These individuals may be key in designing products and systems, they may generate new business or they may have specialist skills that are vital to the success of your company.

The loss of a key person could have a significant financial impact on your business and key person insurance is designed to provide a cash lump sum to cover potential lost revenue and also the cost of sourcing and training a new member of staff to replace them. It can also be used to cover any business loans which are guaranteed by that person.

How does Key Person Insurance work?

Key person insurance is a life insurance policy that is taken out by a business on the life of a key employee. It is also possible for the policy to include serious illness cover which would pay out on the diagnosis of a serious illness, such as cancer or a heart attack.

Should the key person die, or suffer a serious illness, the policy would pay out a lump sum to the business and the business can then in turn use these funds to cover the costs associated with losing that key employee.

What does Keyman Insurance Cover?

Keyman insurance is designed to cover the loss of income/profit and also the cost of sourcing a replacement employee. It can also be used to cover any loans to the company which were guaranteed by the key person.

The loss of a key employee could have a drastic impact on the company’s income or future profit and it could be extremely difficult to find a replacement for this employee.

Key person cover can be taken out at any time and will pay out a lump sum in the event of the key person’s death, and can include a lumpsum payment if diagnosed with a specified serious illness.

How much cover do I need to put in place?

The cover amount is usually based on the anticipated loss of profits, as a result of the loss of the employee, as well as the costs associated with the recruiting a replacement. It could also include an amount to cover any personal loans to the company, or loans guaranteed by that key person.

How do I set up Key Person Insurance?

Key person insurance is a term assurance policy taken out by a company to cover the life of the keyperson. The company must complete a life insurance application form. The application form should record the company as the owner and payee of the policy and the key person as the employee they are covering.

What term should a company set up a Key Person Policy for?

Typically companies usually opt for a policy term of 10 years and include a conversion option which means that if they want the option to extend the cover in the future, they can do so without the need for further medical evidence.

Is it important to include Serious Illness in a Keyperson Policy?

This is an option but not compulsory, but no harm in getting quotes to see what the associated price would be.

Income Protection or Key Person Insurance? Which do I need?

At first glance, they both might seem like the same thing.

Key Person Insurance is designed to protect a company’s financial security. Income Protection, however, looks after an individual and their family (following diagnosis of an illness or after an injury which prohibits the person from working for a period of time).

Which is the best company to take out a Keyperson Policy with?

At Citywide Financial we compare all quotes from leading providers in Ireland, to ensure the best cover at the best price.

Get in touch

Do you have any questions about Keyperson insurance? If so, don’t hesitate to contact us and we’d be happy to set up a free consultation to discuss what’s needed for you and your company.

Rob O’Neill – CEO Citywide Financial

01 513 8710

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