Key-man Insurance

Premiums for a key-man policy are to compensate the company for the loss of profits due to the death, critical illness, accident or injury of key personnel. If a claim is made, any proceeds paid out under the policy will be taxed as a trading receipt of the company. Under key-man insurance, as the company receives the payout and not the employee, the shareholders would still be taxed on any withdrawals. In most small companies where the director or their family are the major shareholders, this insurance is unlikely to qualify, and they should instead consider relevant life policies. You can read about relevant life policies in our article here. 

HMRC requirements for key-man insurance are:

a) The relationship is that of an employer-employee

b) The insurance is for loss of trading income (not capital) arising directly from their death

c) The policy is short-term; meaning they must have an expiry date, such as retirement age, and have no other associated benefits

There is usually no P11d benefit on the employee for this policy, and the cost is allowable for corporation tax. 

Criteria that would disallow a premium

HMRC explicitly state that key-man insurance will be disallowable where the directors are also significant shareholders. If the insurance is really for the protection of the shareholders' income on the death of a key director, then the premiums are not really for protecting the company's profits. The benefits to shareholders must be incidental rather than vice versa. Directors wishing to take out insurance against their death would be better served using a relevant life policy. Relevant Life Policies are also tax-free benefits on death, but unlike key-man insurance, these payout on the death of any employee to their next of kin. 

Policies with investment content, whole life or endowment benefits will be disallowed. HMRC would also disallow a premium if there appears to be a dual purpose. Examples include using it to provide collateral on a loan taken out by the company or the employee's debts (i.e. mortgage on a house).

Conclusion

In most cases, relevant life policies are likely to be more suitable for small businesses instead of key-man insurance. We recommend discussing this with your insurer and your account manager before taking out any policy.