Cover Key Employees

This is usually considered to be a benefit to the business. The premiums are tax-deductible. 

The benefits are taxed as a trading receipt, so the amount of life cover will need to factor in the taxation. 

Protects Shareholders

This does not benefit the business. 

The premiums are not tax-deductible. 

The benefits are taxed as a trading receipt 

Protects Business Loans

This is a benefit to the lender, rather than to the business. The premiums are not tax-deductible. 

The payout is not normally classed as a trading receipt, rebalancing the company's capital account, which is not liable to tax.

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What is 3 + 5 =

The typical level of Key Person Insurance cover is calculated in one of two possible ways, as follows: 

1) Based on a multiple of company profits, typically two times gross profit or five times net profit.  

2) Based on the key person's contribution to the company's profitability

The Key person's remuneration is divided by the total salary of the business, then multiplied by the average gross profit over two years. Then multiplied by the number of years the business expects it will take to recover.

HMRC will consider the purpose of the insurance, and who is to receive the benefits, to determine the tax treatment. 

Most commonly, Key Person Insurance is taken out by a company to:

• Cover key employees
• Protect business loans
• Protect shareholders

The Taxation of Key Person Insurance

Tax implications are dependent upon how the policy is used 

How much Key Person Insurance cover should we take out?

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