What is key person insurance?
Key person insurance (also called key man insurance) is a life or critical illness policy taken out by a business on the life of a key employee or director. If that person dies or suffers a serious illness, the policy pays a lump sum directly to the business.
Who counts as a key person?
A key person is anyone whose loss would significantly harm the business. This could include:
- Managing directors and founders
- Top salespeople responsible for significant revenue
- Technical specialists whose skills are hard to replace
- Key account managers with strong client relationships
What can the payout be used for?
The lump sum can be used in any way the business chooses, including:
- Recruiting and training a replacement
- Repaying business loans or overdrafts
- Covering lost profits during the transition
- Reassuring clients and investors
How much key person insurance do I need?
A common approach is to insure 5–10 times the key person's salary, or to calculate the estimated impact on profits over the period it would take to find a replacement. Speak to a specialist adviser for a tailored recommendation.
Is key person insurance tax-deductible?
Whether premiums are tax-deductible depends on HMRC's interpretation of the policy's purpose. If the policy is taken out solely to protect business profits (not as a benefit to the individual), premiums may be deductible — but any payout would then be taxable. Always take specialist tax advice.
Key person insurance vs relevant life policy
Key person insurance protects the business. A relevant life policy is a death-in-service benefit arranged by the company for the individual employee's family. Both can be held simultaneously.
How to get key person insurance
Compare quotes from leading UK insurers. The policy is owned by the business and premiums are paid from company funds. Cover can include life, critical illness, or both.
Frequently Asked Questions
Yes. Sole traders can take out key person insurance on themselves, though it's more commonly used by limited companies.
The policy can usually be cancelled or transferred. Some businesses convert key person cover to a personal policy for the individual.
Most policies run for a fixed term — often 5 or 10 years — and can be renewed as needed.