Keyman and employer-employee insurance, compared

What keyman insurance is for

Some businesses depend disproportionately on one person. A founder holding the principal client relationships. A technical head whose knowledge is not documented anywhere. A partner whose personal guarantee supports the borrowing.

Keyman insurance is a policy taken by the company on the life of that individual, where the company pays the premium and the company is the beneficiary. The purpose is not to look after the family — it is to give the business a cash cushion to survive the disruption: replacing the person, reassuring lenders, holding the business together while revenue is disturbed.

The sum assured should therefore be reasoned from the business impact, not from the individual's salary. What would revenue realistically do, for how long, and what would it cost to replace the capability?

What employer-employee insurance is for

Here the company effects a policy on the life of an employee as a benefit to that employee. The intent, structure and beneficiary are different: the employee or their family receives the proceeds, and the arrangement typically contemplates that ownership of the policy passes to the employee, often after a defined period.

It is used as a retention tool and as a way of providing meaningful cover to senior staff. Because the policy can follow the individual, it does something group cover does not — it does not necessarily end the day employment does.

The distinctions that actually matter

• Who owns the policy. Keyman: the company, throughout. Employer-employee: the company initially, with assignment to the individual contemplated.
• Who receives the proceeds. Keyman: the company. Employer-employee: the individual or their nominee.
• What it is protecting. Keyman protects the business. Employer-employee protects the family, at the company’s cost.
• What happens when the person leaves. Keyman cover is usually surrendered or lapsed, since the insurable interest has gone. Employer-employee cover is frequently assigned to the individual, who continues it.

On tax, get advice before you structure

This is the area where these arrangements are most often oversold, and the one where general statements are least useful.

The treatment of the premium in the company's hands, the treatment of proceeds when received, the treatment of an assignment to the employee, and the position of the individual at that moment are all fact-specific. They depend on how the policy is structured, how the board resolution and employment terms are framed, the nature of the plan chosen, and the tax law as it stands.

Structures of this kind have attracted scrutiny where the commercial substance was thin — where the arrangement existed mainly to move money rather than to insure a genuine risk. The safeguard is straightforward: have a real commercial rationale, document it properly at the time, and take a written position from your chartered accountant before the policy is issued rather than at assessment.

What neither of these does

Neither is a substitute for cover the individual owns personally. Keyman proceeds go to the company; the family receives nothing from it. Employer-employee cover depends on the company continuing the arrangement and on the assignment actually happening.

Anyone with dependants needs adequate personal term cover in their own name regardless of what the company holds. And a business with concentration risk in one person should look at the whole picture — group cover for the wider team, and the succession question of what happens to ownership and control, which insurance funds but does not answer.