An essential business insurance for most firms, key person (or key man) insurance protects your company from the financial risk involved with losing a crucial member of staff. Whether it’s a visionary founder, your top-performing salesperson, or a tech genius, if their sudden absence could significantly stall your daily operations and hit the business hard, financially, they are likely a key person.
We look at how this type of business protection insurance works, who it protects, and how to compare different cover types and providers to ensure you choose the right policy for your business.
Protect your business' key personnel
What is key person insurance and how does it work?
key man insurance is a type of life insurance policy that provides a financial safety net for your business, when a member of staff (named on the policy) becomes critically ill or passes away unexpectedly.
A valuable employee can be protected if they are considered indispensable to the business. This is typically a person that performs a highly specific function that nobody else is qualified to pick up in their absence, or possibly someone with substantial business experience and knowledge that would be difficult to replace. It might even be someone that brings in a lionshare of business income in their role, that the business is heavily reliant on.
While it’s difficult to replace skills and knowledge, a tax free lump sum to help the business through this type of loss can be highly beneficial.
Benefits
When a business loses a member of the team that is vital to business continuity, this type of payout can help to:
-
Quickly recruit a qualified replacement
-
Cover any lost revenue in the wake of their absence
-
Protect outstanding business loans or debt during a challenging transition
How it works
-
Identify key Individuals - key man or key person insurance can be used for a whole host of different types of employee. The difficult part is defining which members of your team bring in significant business income, or whose absence would create the most disruption to your functionality
-
Calculate cover - putting a price on replacing a human being can be tough, but most insurers recommend using 5-10 times the key person’s gross annual salary or trying to calculate how much the business would lose in their absence, and multiplying that by the period of anticipated disruption for your firm (typically 2-5 years)
-
Arrange policy - It’s crucial to ensure you get the right level of cover for your business, and that your policy provider operates in your area of business, especially if you operate in a high risk field. It’s highly recommended to take independent financial advice from someone with experience in key person insurance beforehand
-
Claims - Should you lose a member of staff who is covered as a key man on your key person life insurance policy, you file a claim and once approved, receive a tax-free lump sum in line with your calculations
Who it’s for and who it can cover
Unlike standard life insurance, with this type of policy the business pays the monthly premiums, and acts as the sole policy holder and beneficiary. However, it’s important to understand that key man policies are not just for large corporations.
In reality, small to medium enterprises (SMEs) and startups are typically the most vulnerable to the loss of key staff, and would typically be more substantially impacted than large conglomerates by this type of loss.
While every business model is different, a policy can cover any employee whose input is directly tied to your financial survival in some way. For example:
-
Founder(s) and/or Managing Director(s) - especially where reputation is based on their status, or where key strategic business information is held
-
Finance Director(s) - those involved in maintaining the firm’s cashflow and lines of credit are often crucial to business operations
-
Technical experts - particularly if your business uses in-house software and tools
-
Industry specialists - those with unique or proprietary knowledge of your business or with specialist skills that are not easily transferable
-
Key Account Managers - this could be high performing staff or those with important relationships to high value clients
This is not an exhaustive list and the key man candidates can vary dramatically depending on the size of your firm, and the industry that you operate in.
key person insurance calculator
Key person insurance costs can be incredibly difficult to calculate. While it can be relatively easy to estimate the income derived from individual fee-earning employees, the loss of finance from a key person with vital skills and knowledge that the business is entirely dependent on, can be much harder to gauge.
Our key person insurance calculator below can help you to predict the level of cover you would need for each member of staff named on your policy. You can opt to calculate this on both a salary and profit basis, depending on your preference, simply choose the relevant radio button below:
Available insurance providers
There are many UK providers of key person insurance, each with different policy rules and payout terms. Premiums can also vary considerably between one provider and the next, as well as based on the health of those key members of staff you wish to protect.
It’s, therefore, important to look at key man insurance offerings across the entire market before you commit to a particular provider. Some you could consider are:
|
Provider |
Policy Type Available |
Key Features & Market Focus |
|
Life Cover & Critical Illness |
The UK market standard for SMEs; offers highly flexible level or decreasing term structures designed to protect trading profits or outstanding business loans |
|
|
Life Cover & Critical Illness |
Features massive corporate capacity (now incorporating legacy AIG Life UK policies) backed by extensive workplace wellbeing services and digital GP access |
|
|
Life Cover & Critical Illness |
A prominent mutual insurer offering a "menu-based" business protection layout, allowing companies to easily mix and match cover levels for different staff under one roof |
|
|
Life Cover & "Select" Critical Illness |
Provides tiered critical illness options with clear, granular definitions, frequently utilised to offset high headhunting and recruitment friction |
|
|
Life Cover & Critical Illness |
Uses a unique rewards-based structure where the healthy lifestyle choices of the insured employee can actively lower the business’ monthly premiums |
|
|
Life Cover & Critical Illness |
Highly specialist in matching term lengths and payouts directly to the amortisation schedules of commercial mortgages and director loans |
|
|
Life Cover & Business Protection |
Often directly tied to major UK commercial banking groups, making them a smooth choice if the insurance is a mandatory condition of a business bank loan |
|
|
Life Cover & Critical Illness |
Renowned for premium, "high-definition" policies with broader critical illness coverage thresholds and a simpler, less restrictive claims process |
|
|
Life Cover & Executive Income Protection |
Excellent at combining standard lump-sum payouts with executive income support if an indispensable team member faces long-term sick leave |
|
|
Corporate Life & Group Protection |
Focuses heavily on larger corporate structures, packing in excellent mental health, estate planning, and probate support services via their corporate apps |
|
|
Personal Accident Cover for Key Staff |
Note: This is not a standard medical life policy. It pays out cash benefits strictly if a key employee suffers a workplace or travel accident that leaves them temporarily or permanently unable to work |
How to get the right cover
Because every business carries unique liabilities, it’s important to ensure that your business protection is tailored to match your corporate structure and individual financial risks.
How you operate can impact the style of your policy, and business partnerships or firms with complex shareholder agreements often need to structure the policy as key person insurance in trust. This ensures that the proceeds are distributed correctly and smoothly to the remaining business partners, should one pass away or fall critically ill.
You can also choose a policy that has life cover only, or one that includes critical illness cover. With certain severe illnesses, taking time out of work to recover for an extended period of time could potentially disrupt a business as significantly as a death.
It can also be highly beneficial to seek independent tax advice before arranging this type of policy. How your business and policy is structured can impact whether or not you are entitled to tax relief, so getting this right can help you save on your premiums or your payout, should you ever need to make a claim.
Is key person insurance tax deductible?
The taxation of key person insurance depends on how the policy is structured. If the policy is strictly set up to offset a loss of trading profits due to the direct loss of a key staff member, premiums typically are tax deductible, however, if the intention is that the policy is used to repay a director’s loan, they won’t be.
You also have to balance the fact that if your premiums are tax-deductible, any payouts will likely be subject to corporation tax, whereas if they are not, your payout is typically tax-free. The below table explains why your policy may or may not be tax deductible, but it’s important to ensure you take independent tax advice before you arrange a policy:
|
Feature / Criteria |
Tax-Deductible Setup(Trading Purposes) |
Non-Tax-Deductible Setup(Capital Purposes) |
|
Primary Objective |
To replace lost revenue, offset a drop in business turnover, or fund the recruitment/headhunting of a replacement. |
To repay a commercial bank loan, a director’s loan account (DLA), or a business mortgage. |
|
Insured Person Profile |
A standard employee or a working director with a minor or no shareholding (typically under 5%). |
A company founder, major shareholder, or majority partner. |
|
Policy Structure |
Short, fixed-term policy (typically 5 years or less) with zero investment or cash-surrender value. |
Whole-of-life policies, or terms matched explicitly to the amortization of a capital debt. |
|
HMRC Treatment of Monthly Premiums |
Tax-Deductible: Can be offset against profits as an allowable business expense under the "wholly and exclusively" rule. |
Not Tax-Deductible: Paid out of post-tax profits; cannot be used to lower your Corporation Tax bill. |
|
HMRC Treatment of Eventual Payout |
Taxable: The lump sum is treated as trading income and is subject to standard Corporation Tax. |
Tax-Free: The lump sum is treated as a capital receipt, meaning the business receives the full payout cleanly. |
|
Strategic Insurance Action Required |
Must "Gross Up" the policy: You must increase the total coverage amount to ensure you are left with enough funds after tax is deducted. |
Match the exact liability: The cover amount should mirror the exact size of the outstanding business debt. |
Why choose Money Helpdesk for your business protection?
When it comes to protecting your business, expert advice is essential. Our team of specialist business protection brokers can compare key man policies across the market to ensure we find the best fit for your unique corporation.
We’ll help you structure the policy to maximise your benefits, whether direct corporate ownership or a key person insurance in trust is required, we can ensure you have total peace of mind in your business future, no matter what disaster may befall you or your essential team members.
Get started to speak to one of our business protection experts today. Your initial chat is always free and there is no obligation to proceed.
Generally, no. The vast majority of key person policies are set up as term assurance, meaning they only last for a specific, agreed-upon timeframe. This is usually matched to a business milestone, such as the duration of a critical commercial loan, or up until the key individual’s planned retirement age.
Whole of life key person insurance policies exist, but are very rare, as most employees eventually move on or retire.