Key Person Insurance for Expat Business Owners: How It Works
If your business depends on one or two people, losing them can hurt more than losing a customer. Key person insurance pays the business a lump sum if that person dies, or if you choose to add illness cover, becomes seriously ill. For expat business owners the main questions are who owns the policy, how much to insure and how the tax works. This guide answers them.
This guide is general information, not personal or tax advice. Tax treatment depends on the policy and the company.
What key person insurance is
Key person insurance is a policy that pays the business if an important person dies. The business owns the policy, pays the premiums and receives the payout. The money can cover lost profit, recruitment costs, repayment of loans or time to find a replacement.
It is different from the personal life insurance that protects a family. Our guide to how much life insurance expats need covers personal cover.
Who counts as a key person
A key person is someone whose loss would cut profit or put the business at risk. Typical examples are:
- a founder who brings in the main clients
- a director with specialist technical skills
- a sales lead who holds the key relationships
- the person whose name or licence the business depends on
- someone who guarantees the company’s borrowing
If you run an expat business, you may be the key person yourself. Clients, banks and landlords often rely on one individual.
How much to insure
There is no single formula. Common ways to set the sum are:
- Profit method. Estimate the profit that person brings in and multiply by the years the business would need to recover. Many advisers use a figure of one to five years.
- Salary method. A multiple of the person’s salary and benefits.
- Cost-of-replacement method. Recruitment, training and a temporary hire.
- Loan method. The amount of borrowing that would need repaying.
Use a prudent figure and write down how you reached it. Review it every year, because profit and borrowing change. The insurer will want to see that the sum is reasonable for the person’s value to the business.
Types of cover
- Level term. The payout stays the same for the term. This suits a fixed need.
- Decreasing term. The payout falls over time, which suits a reducing loan.
- Increasing term. The cover rises each year to keep up with growth.
Check the term. A policy should not run beyond the period in which the person is useful to the business, which also matters for the tax treatment below.
Who owns the policy
The business normally owns the policy and pays the premiums. The payout goes to the business, not the family of the key person. That is the point: it protects the company. If you want a payout to go to family or shareholders, that is a separate arrangement, such as a personal policy or a shareholder protection policy.
How HMRC treats premiums and payouts
The tax treatment is a common source of mistakes. HMRC’s guidance for UK companies says that premiums are deductible only if the policy meets two tests:
- Duration. For life cover, the policy should be a term policy with no other benefits, and the term should not go beyond the period of the person’s usefulness to the company.
- Revenue purpose. The aim must be to cover lost trading income, not a capital loss. Whole of life, endowment or investment-linked policies are treated as capital and their premiums are not deductible.
If the tests are met, the payout is generally treated as trading income of the company. If they are not met, the premiums are not deductible and the payout is generally not taxed as trading income. HMRC says it cannot guarantee how future receipts will be treated, so take advice at the outset.
A worked example
This example is illustrative. A consultancy earns £400,000 a year in profit, and about half of that comes from clients who deal only with the founder. If the founder died, the company estimates it would take two years to hire a replacement and rebuild the relationships.
- Profit at risk: £200,000 a year for two years, which is £400,000
- Recruitment and handover: £60,000
- Loan guaranteed by the founder: £150,000
- Suggested cover: about £610,000
The company then compares this with the cost of the premiums and decides whether to cover all of it or part. It also records how the figure was reached, so it can show a reason for the cover if HMRC or a lender asks.
What the insurer asks
Expect the insurer to ask about:
- the key person’s age, health and smoking status
- their role and why they matter to the business
- the business’s profit, turnover and borrowing
- who owns the business and any other cover in place
- where the key person lives and works
The insurer wants to see that the business has an insurable interest in the person and that the sum is reasonable. A sum far above the person’s value to the business can lead to a reduction or a refusal.
Adding illness cover
Some policies add critical illness cover to the death benefit, so the company is paid if the key person is seriously ill. This costs more but covers a risk that death cover does not. Tax treatment can differ for illness cover, and HMRC’s guidance treats policies with other benefits differently. Ask an accountant before you add it.
What key person cover does not do
Key person insurance has limits. It does not:
- pay the key person’s family
- replace the person’s skills
- protect against the key person leaving rather than dying
- cover a loss caused by an exclusion in the policy
- remove the need for a succession plan
It also does not deal with what happens to shares. If the key person is a shareholder, you may also need shareholder protection, so that surviving owners can buy the shares from the estate. That is a separate policy with its own tax treatment.
Key person cover for expat business owners
Expat businesses raise some extra questions.
- Where is the company? The HMRC rules above apply to UK companies. An overseas company is taxed under its own country’s rules, so get local tax advice.
- Which insurer? Many UK insurers will cover a UK company with directors abroad, but some limit cover for people who live overseas. International insurers may be an option. See our guide on what happens to your life cover when you move country.
- Currency. If the company’s revenue is in another currency, consider whether the payout will match its costs.
- Medical underwriting. The key person will normally need to answer health questions.
- Banks and lenders. If a lender requires cover as a loan condition, check the exact wording.
Related cover
Key person insurance often sits with other protection. Business owners also consider critical illness cover, income protection and shareholder protection. Read about critical illness cover abroad and income protection for expats. For the full range, see our expat insurance hub and our expat life insurance page. Key people are also exposed personally. See critical illness cover abroad, income protection for expat contractors and pre-existing conditions and expat health insurance.
Steps to put it in place
- List the people whose loss would hurt the business.
- Estimate the financial impact for each.
- Choose the type, term and sum assured.
- Check the tax position with an accountant.
- Compare insurers and read the exclusions.
- Arrange the policy in the company’s name.
- Review it every year.
Frequently asked questions
What is key person insurance?
It is a policy owned by the business that pays out if an important person dies, to help the company cope with the loss.
How much key person cover do I need?
Base it on the profit the person brings in, the cost to replace them and any loans. Review it each year.
Are key person premiums tax deductible?
For UK companies, only if the policy meets HMRC’s tests, including being term cover for a revenue purpose. Take advice.
Is the payout taxable?
If the premiums were deductible, the payout is generally trading income. If not, it is generally not taxed as trading income.
Can an expat business owner get key person cover?
Often yes, but insurers differ on residency. Compare UK and international insurers.
This article is for information only and is not financial or tax advice. Tax rules and insurer terms can change. Take advice from a regulated adviser and an accountant.
