Key Man Insurance or Relevant Life Insurance: Which Does Your Business Need?
Key man insurance and relevant life insurance are both life insurance products designed to protect businesses and their employees. There are crucial differences between the two insurance policies which you need to understand to ensure you get the right protection in place.
Read on to understand the differences between each life policy and find out which insurance is most suited to you and the needs of your business.
What’s the difference between relevant life and key man insurance?
Key man insurance protects the business; relevant life insurance protects your staff and their family.
Key man and relevant life insurance are both life insurance policies. The way they pay out is what separates them; key man insurance is designed to protect the needs of a business in the event of a key employee dying or becoming critically ill, relevant life cover is for the insured employee and their family.
Both types of life insurance policy are owned by the business and the premiums are paid by the firm. The one major difference is who benefits in the event of a claim being made.
Key man insurance vs. relevant life cover
See in a glance the differences between the two different life insurance policies.
The table below pitches the two options head-to-head…
|Key Man Insurance||Relevant Life Cover|
|Who owns the policy and pays the premiums?|
|Owned by the business and paid for by the business||Owned by the business and paid for by the business|
|Who does it protect?|
|Protects the company by providing a cushion of cash to help the business survive the loss of a key employee, due to death or critical illness (if included)||Protects the family of an employee by providing a tax-free lump sum in the event that the employee dies|
|Why should I get this cover?|
|Key man insurance is designed to help a company survive the loss of a key employee by providing cash to help sustain the needs of a business during a difficult transitional phase. Lenders and investors often require adequate key man cover to be in place if they are lending money, or considering investing in a business, to protect their risk||Relevant life insurance is usually taken out by directors of a business for themselves to protect their families. It is also used by smaller companies wanting offer life insurance to their employees when they don’t have enough employees for a fully-fledged Death in Service scheme|
|Possible to add critical illness cover for more comprehensive protection||Additional protection against critical illness has to be paid for separately due to different tax treatment|
|How is it taxed?|
|Used as a tool to help business continuity, benefit is paid back into the company and is generally treated as a taxable trading receipt. Depending on how it is set up and the reasons for holding the insurance, premiums may be tax deductible as an allowable business expense||Benefits should pay out a tax-free cash lump sum to your loved one, you can set the life insurance policy up in a trust structure to ensure this happens. Premiums paid qualify for corporation tax relief, income tax relief and National Insurance relief so can be a great way to protect your family, instead of a personal life insurance policy|
|Level of Cover|
|Will depend on business metrics and how senior or critical an employee is to the profitable running of the business||Usually represented as multiples of your annual salary, plus any dividends|
Should I choose Key man insurance or relevant life cover?
Key man insurance cover is suitable for businesses who have one, or a few key members of staff who perform roles crucial to the success of a company. Having a cash lump sum on hand to help fund a transition when you lose a vital member of staff with no warning could, in the worst case scenario, help prevent bankruptcy.
Key man insurance may also be necessary when taking out a business loan. Some banks and lenders may request that adequate key man insurance is in place before they’ll agree to lend money to a small business, to help protect their risk.
If key man insurance is taken out to protect a business loan, the premiums you pay are unlikely to be tax-deductible since any pay out is intended for for the lender’s direct benefit, rather than to protect business continuity.
Key man insurance is suitable for:
- Businesses wishing to protect themselves in the event that they suddenly lose a key member of staff, when a cash lump sum could make help business continue to trade without too much disruption, protect against short term income loss and avoid otherwise potentially devastating consequences
- Companies borrowing business loans; some banks and lenders require adequate cover to be in place to protect their risk. Key man insurance for this purpose is often cheaper since the loan amount will decrease as you pay off the capital, therefore the amount of money you need as insurance will decrease in line, as you pay down the bank loan
Relevant life cover is often chosen by small businesses as a way to offer additional benefits to their staff when there aren’t enough employees to set up a full Death in Service scheme.
Relevant life insurance is often a good option for directors of a business or employees paying higher rate tax since premiums on relevant life cover qualify for corporation tax relief, income tax relief and National Insurance relief. Which would not be applicable if you had a personal life insurance policy.
Relevant life cover can also be held in trust so you can be assured that any benefits paid to your loved ones in the event of your death will be tax-free.
Relevant life cover is suitable for:
- Company directors who can benefit from tax advantages they wouldn’t get through a personal life insurance policy
- Small businesses who don’t have adequate numbers of employees to arrange a group life insurance policy
- Directors of companies considering key man insurance, so that the company can pay the premiums
- High earners or directors with high value pension funds who wish to avoid additional benefits adding to their lifetime allowance
Speak to an expert
We work with insurance experts who can help you understand which life insurance product would best serve the needs of your business and employees.
All the experts we work with are independent financial advisors authorised and regulated by the Financial Conduct Authority and fully qualified to provide advice.
Call 0808 189 0463 or make an enquiry for a free, no-obligation chat and we’ll match you with an expert today.