Glossary · UK
What is Keyman Insurance?
Business-owned life or critical illness insurance that pays out to the company if a key director or employee dies or is diagnosed with a specified serious illness.
Full Definition
Keyman insurance (also called key person insurance) is a life insurance or combined life and critical illness policy taken out by a business, on the life of a director, founder or other individual whose skills, contacts or leadership are considered critical to the company's ongoing profitability, with the payout going to the company itself rather than to the key person's family. The aim is to protect the business against the financial impact of losing that person unexpectedly -- covering lost profits while a replacement is found and trained, repaying business debts that were only extended on the strength of that person's involvement, or funding the cost of recruiting and onboarding a successor. Whether premiums qualify as a deductible business expense for Corporation Tax, and whether any payout is treated as a taxable trading receipt, depends on HMRC's long-standing guidance (based on the 1944 Anders case) looking at factors such as the purpose of the cover, whether it is for loss of profit versus a capital purpose, and the term of the policy relative to the key person's expected service, so specialist tax advice is usually needed when setting up cover. Keyman insurance is distinct from relevant life insurance, which is written in trust for the benefit of the individual's own family rather than to protect the business itself.