What Is Key Person Insurance?
Key person insurance is a life insurance policy taken out by a business on the life of a person whose death or critical illness would cause significant financial loss to the company. The business owns the policy, pays the premiums, and receives the payout.
The “key person” could be a founder, director, top salesperson, lead developer, or anyone whose skills, knowledge, contacts, or leadership are critical to the business’s continued success.
What Does Key Person Insurance Cover?
- Recruitment costs – Finding and training a replacement for a key person can cost tens or hundreds of thousands of pounds
- Lost revenue – If the key person generates significant income (sales, client relationships), their loss directly impacts the bottom line
- Debt repayment – Business loans often have personal guarantees. Key person cover ensures the business can meet these obligations
- Investor / stakeholder confidence – Shows that the business has planned for succession and risk management
Is Key Person Insurance Tax Deductible?
In many cases, yes. HMRC generally allows key person insurance premiums as a tax-deductible business expense if the policy meets certain criteria:
- The sole purpose is to protect the business against financial loss
- The policy is for a fixed term (not whole of life)
- The payout goes to the business, not to the individual’s family
However, the payout received by the business may be subject to corporation tax. Always consult your accountant for advice specific to your situation.
How Much Key Person Cover Do You Need?
There is no single formula, but common approaches include:
- Multiple of salary: 5–10 times the key person’s annual salary
- Revenue-based: Cover equal to 2–3 years of the key person’s contribution to revenue
- Profit-based: Cover the expected profit impact over 2–5 years
- Debt-based: Cover any business debts that the key person guarantees
How to Set Up Key Person Insurance
The process is straightforward: the business applies for the policy, naming the key person as the life assured. The key person answers health questions. The business pays the premiums and receives any payout. Most applications are completed in under 30 minutes.
Frequently Asked Questions
A business policy that pays the company a lump sum if a vital employee or director dies or becomes critically ill.
Generally yes, as a business expense. Payouts may be subject to corporation tax. Consult your accountant.
Depends on age, health, and cover amount. £500,000 for a healthy 40-year-old: roughly £30–60/month.