| Who owns the policy | The business |
|---|---|
| Who is insured | A director, partner or key employee |
| Cover types | Life cover, with optional critical illness |
| How it pays | Lump sum paid to the business |
| Typical term | Fixed term, often 5 to 15 years |
| Tax treatment | Depends on the arrangement; take accountant advice |
Who is this for?
- SMEs that rely on one or two founders or directors
- Businesses with loans or facilities linked to a key person
- Firms whose key client relationships sit with one person
- Partnerships and LLPs with essential partners
- Companies borrowing via commercial or business finance
What is key person insurance?
Key person insurance is a policy taken out and paid for by a business on the life of someone essential to its success. If that person dies, or is critically ill if this is covered, the business receives a lump sum.
The money can replace lost profits, fund recruitment, reassure lenders and suppliers, or repay business debts. Cover depends on underwriting and policy terms.
It is different from personal life insurance. The insured person's family does not receive the money, and the business must have a genuine financial interest in that person's life.
Who counts as a key person?
A key person is anyone whose loss would cause serious financial harm to the business. That is often a founder or managing director, but it can also be a top salesperson, technical expert or someone holding major client relationships.
Ask what would happen to profits, contracts and borrowing if that person were suddenly gone. If the answer is significant, cover is worth considering.
Many small businesses have more than one key person. Consider who drives sales, who holds technical knowledge and who lenders or investors see as essential.
Partners in partnerships and LLPs can also be insured.
How much key person cover does a business need?
There is no single formula. Insurers commonly accept methods based on a multiple of the person's salary or their contribution to profits, plus any business debts they personally underpin.
The insurer will want to see the cover is justified by evidence such as accounts. We help you arrive at a figure the insurer will accept and the business can defend.
Common approaches include a multiple of the person's remuneration, or a share of gross profit linked to their contribution. Debt-based cover is usually linked to loans the person has guaranteed or that would be called in.
When does key person insurance pay out?
A key person policy pays when the insured person dies, or is diagnosed with a covered critical illness if that option is included. Many life policies also pay on a terminal illness diagnosis.
The business can use the money as it needs, for example to recruit and train a replacement, cover lost revenue, reassure suppliers or repay loans. Payment depends on the claim meeting the policy terms and on full disclosure at application.
How is key person insurance taxed?
The tax treatment depends on why the cover exists and how it is set up. In some cases premiums may be allowable as a business expense, and the payout is then usually taxable as a trading receipt. In others, premiums are not deductible and the payout may not be taxed.
The rules have specific conditions. Speak to your accountant before setting up a policy, and we will work alongside them.
Factors that can matter include the purpose of the cover, whether the insured person is a significant shareholder and the length of the policy term.
How does key person cover support business borrowing?
When a small business borrows, lenders know repayment often depends on one or two people. Key person or loan protection cover can provide money to repay or reduce the debt if that person dies or is seriously ill.
This can also reduce the risk to directors who have given personal guarantees. Cover should match the loan amount and term, and be reviewed if borrowing changes.
How does it fit with other business protection?
Key person cover protects the business itself. Other policies cover different risks.
- Shareholder or partnership protection: funds the surviving owners to buy a deceased owner's shares.
- Relevant life cover: employer-paid life insurance for an individual's family.
- Executive income protection: continues paying an employee's salary during long-term illness.
Lenders providing commercial mortgages or business finance sometimes ask about key person cover, especially for smaller companies.
We can review your overall business protection and work with your accountant and solicitor where agreements or trusts are needed.
How we arrange it
- Free 15-minute call
- We identify key people and business risks
- We agree a justified sum insured with your accountant
- We compare insurers and arrange underwriting
- Policy in place and reviewed as the business grows
Frequently asked questions
Who pays for key person insurance?
The business pays the premiums and owns the policy. The business is also the beneficiary, so any payout goes to the company rather than to the insured person's family. Because the policy belongs to the business, it should be set up with the right ownership from the start.
Is key person insurance tax deductible?
Sometimes. Premiums may be an allowable business expense if the cover is purely to protect against loss of profits and meets certain conditions. If so, the payout is usually taxable. Ask your accountant how the rules apply to your business.
Can a business insure more than one key person?
Yes. Many businesses insure several key people, either through separate policies or a multi-life policy. Each person's cover is underwritten individually and needs to be justified by their value to the business. Accounts and business plans are often used as evidence.
Does key person insurance include critical illness?
It can. Critical illness cover is usually an optional addition to key person life cover. It pays the business a lump sum if the key person is diagnosed with a covered condition that meets the policy definition. Adding it increases the premium.
What happens to the policy if the key person leaves?
The business can usually cancel the policy, and some policies allow the life assured to be changed or the policy assigned. Term key person policies usually have no cash value, so nothing is paid back on cancellation. Review cover whenever key staff change.
Is key person insurance a legal requirement?
No, it is not legally required. Some lenders or investors may ask for it as a condition of funding, particularly where the business depends heavily on one or two people. Even without that, it can reassure lenders, investors and key clients that the business can withstand a sudden loss.
What is the difference between key person and shareholder protection?
Key person insurance pays the business to cover lost profits or costs. Shareholder protection provides money for the remaining owners to buy the shares of an owner who dies or is seriously ill. Many businesses need both. Both are often arranged together.
Does the key person need a medical?
The insurer will ask health and lifestyle questions. Depending on the person's age, health and the amount of cover, it may request medical reports or a medical examination. Cover depends on the outcome of underwriting. Answer every question fully and honestly.
Important: Protection policies are subject to underwriting, exclusions and the policy terms. Cover is not guaranteed and will stop if you stop paying premiums. Policies have no cash-in value.