Protect Your Business with Key Person Insurance

The Quick Version

• What it is: Business insurance that pays your company a lump sum if a key director or employee dies, or is seriously ill
• Who it's for: Any UK business that depends on one or more critical individuals to generate revenue or keep operating
• What it covers: Lost revenue, recruitment costs, loan repayments, and business stabilisation - see full details below.
• How to get it: One call with our team - we search every UK insurer and present your options

What is Key Person Insurance?

Ask Yourself This Question

If one of your key directors or your best salesperson didn't come into work tomorrow, not just for a day, but permanently, what would that actually do to your business?

For most owners, the honest answer is uncomfortable. Revenue would drop. Client relationships built over years would be at risk. You'd be recruiting and training at exactly the moment you could least afford the distraction. And if you have loans or credit facilities tied to the business, your lenders would be asking questions you'd struggle to answer.

Who Is Your Key Person?

Think about who that person is in your business right now. It might be you, or it might be a co-director who handles everything on the client side while you run operations. It might be a salesperson who accounts for a disproportionate share of your revenue. Whoever it is, could your business absorb the financial impact of losing them without something in place to cover it?

For most small and medium-sized businesses, the answer is no, and key person insurance changes that.

The business owns the policy, pays for it, and receives the payout directly. It's not a personal benefit for the insured individual. It's a commercial safety net that gives your company the financial breathing room to get through what would otherwise be one of the most difficult periods it could face.

Key person cover can be the difference between the business surviving and going out of business

How much does Key person insurance cost?

How Does Key Person Insurance Work?

The mechanics are straightforward, and understanding them makes it much easier to see why this kind of cover matters so much for owner-managed businesses.

The Business Is the Policyholder

Your company takes out a life insurance policy on the key individual. The business is the policyholder, pays the premiums, and is the beneficiary. If the insured person dies during the term, or suffers a qualifying critical illness if that cover has been included, the insurer pays the agreed lump sum directly into the business bank account.

What Can the Payout Be Used For?

What happens next is up to you. There's no prescription on how the payout has to be used. In reality, most businesses use it for one or more of the following:

Replacing lost revenue: The payout gives the business time to rebuild revenue without the immediate pressure of a collapsing cash flow.

Recruitment and training costs: Senior hires can take months to recruit and even longer before they become fully productive. The payout covers those costs without raiding working capital at the worst possible moment.

Loan and debt repayment: When a key person dies, lenders have the right to review their exposure. A lump sum removes that vulnerability immediately.

Business stabilisation: Sometimes the payout buys time to reassure clients, restructure the team, and make clear-headed decisions rather than reactive ones.

How Long Does the Policy Run?

Key person policies are typically written on a fixed-term basis - five, ten, or fifteen years are common. The term should reflect the period during which the individual poses the greatest financial risk to the business if lost.

No Trust Required

Unlike relevant life insurance, which requires a trust structure, key person insurance is a pure business policy. There are no trusts involved, no personal benefit, and no complex structuring is required. This simplicity is one reason key person insurance is quicker to set up than arrangements that require a trust.

A key person is exactly that. Someone who, if not around, would result in a loss of slowdown of business or income

Who Counts as a Key Person?

This is the question most business owners answer immediately when they think about it honestly. A key person is anyone whose absence would cause the business a financial problem it couldn't easily absorb.

The Director Who Is the Business

For many owner-managed companies, the director isn't just running the business - they are the business. They hold the client relationships. They have a market reputation. They make the decisions that keep everything moving. If you're reading this as a sole director, the answer is almost certainly yes - you are a key person.

The Salesperson Your Revenue Depends On

Every business has someone who punches above their weight commercially. These individuals are often not directors, but they are key people. Their loss wouldn't just be a personnel problem, it would be a revenue problem.

The Technical Specialist Nobody Else Can Replace

In some businesses, the key person isn't client-facing at all. They're the person whose knowledge, skill, or technical expertise. Losing this person doesn't just cost you their salary - it costs you the capability they represent.

Co-Directors and Business Partners

Where a business has two or more directors sharing responsibility, each is potentially a key person to the other. If your concern is specifically about what happens to the shares if a co-director dies, that's shareholder protection territory.

A Simple Test

If you're unsure whether someone qualifies as a key person, ask yourself this: if they handed in their notice tomorrow, would you be genuinely worried about the financial impact on the business? Not just inconvenienced, but worried. If the answer is yes, they're a key person and the business is currently carrying an uninsured risk.

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The Tax Treatment of Key Person Insurance

The Tax Position Is Not Automatic

The tax position on key person insurance is more nuanced than relevant life, and it's worth being straightforward about that. Unlike relevant life, where the tax treatment is clear and consistent, key person insurance doesn't have a one-size-fits-all answer. Whether your premiums qualify for corporation tax relief depends on the specific purpose of your policy.

When Corporation Tax Relief May Apply

Where the policy is designed to protect against lost trading income, HMRC may treat the premiums as an allowable business expense, qualifying for corporation tax relief. Where that relief applies on the premiums, the payout is generally treated as a trading receipt and subject to corporation tax when it arrives. The two positions mirror each other.

When the Tax Treatment Differs

Where the policy is protecting a capital interest rather than trading income, for example, funding a share purchase or a director buyout, the tax treatment is different. That type of arrangement is more likely to be shareholder protection.

What This Means for Your Business

For most businesses taking out key person cover on a director or key employee to protect against lost revenue, the overall financial case remains very strong. The important thing is that the policy correctly from the outset and clearly document its purpose.

A tax-free payment to your business when it needs it most

How Much Cover Does Your Business Need?

This is the question most business owners find hardest to answer, and the one that matters most to get right.

Method 1: Multiple of Salary or Contribution

The simplest starting point is a multiple of the key person's total financial contribution, which is typically between five and ten times their salary or remuneration. For a director drawing salary and dividends, the calculation should reflect total remuneration, not salary alone.

Method 2: Cost of Replacement

This approach focuses on what it would cost to replace the key person, including recruitment fees (20-30% of annual salary for senior hires), the time before a replacement becomes fully productive (often twelve months or more), management time, and the potential cost of retaining clients who might otherwise leave.

Method 3: Loan and Liability Coverage

The third approach is relevant where the business has significant borrowing underwritten in part by the presence of a key individual. The cover level should be sufficient to repay or substantially reduce the relevant debt, removing the lender's ability to call it in at the worst possible moment.

Which Method Is Right for Your Business?

In practice, the right answer usually emerges from a conversation rather than a formula. Don't pick a number at random, and don't default to the lowest figure because the premium looks more comfortable. At Executive Life, we work through the calculation with every client, look at all three methods, and help you land on a figure that genuinely reflects the risk.

Should You Include Critical Cover?

Critical Illness Is More Likely Than Death

When you arrange key person insurance, you have the option to include critical illness cover alongside the life cover. The likelihood of a key person suffering a serious illness during their working life is significantly higher than the likelihood of them dying. For a director in their forties or fifties, a critical illness diagnosis is a very real risk.

One Thing Key Person Does That Relevant Life Can't

Relevant life insurance covers death only. Critical illness cover cannot be added to a relevant life policy. That means if your only protection arrangement is a relevant life policy, you have no cover in place for the scenario that is statistically more likely to happen. Key person insurance fills that gap.

You Already Know Who Your Key Person Is

The question is whether your business could absorb losing them without cover in place. One call with our team gets you a whole-of-market comparison, tailored to your business, with no obligation. Arrange a call with Executive Life today.

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