Key person insurance
Cover that pays your business a lump sum if a person it cannot trade without dies or is diagnosed with a serious illness. The company owns the policy, pays the premium and receives the pay-out.
Most small businesses have one or two people whose loss would hit profits immediately: a founder, a rainmaker, the only person who holds the key client relationships or the technical knowledge. Key person insurance pays the business a lump sum if that person dies, or (with critical illness cover added) is diagnosed with a defined serious illness, during the policy term. The money buys time: to recruit, to reassure the bank and key customers, and to replace lost profit while the business steadies itself.
Who this is for
- Your business depends heavily on one or two individuals for revenue, client relationships or technical know-how.
- Your bank or investors have asked what happens to the business if a founder dies.
- You are a director with a loan account or borrowing personally guaranteed against the business.
- You have been asked for key person cover as a condition of a business loan or investment round.
How key person insurance works
The business takes out a life policy (often with critical illness cover added) on the life of the key individual, with the individual's written consent. The business pays the premiums and is the beneficiary. If the key person dies or suffers a defined critical illness during the term, the insurer pays the lump sum to the business. There is no trust involved; the pay-out lands in the company bank account for the directors to deploy.
How much cover does a business need
There is no single formula, but three approaches dominate. A multiple of the key person's salary (typically five to ten times) is the simplest. A multiple of the profit they are responsible for (commonly around two times gross profit or up to five times net profit attributable to them) is more precise for revenue generators. For loan-linked cover, the sum assured simply matches the outstanding borrowing. We model the options with you and sense-check them against what an insurer will actually accept, because insurers ask for financial justification on larger sums.
Tax treatment, in brief and with a health warning
Premium and pay-out treatment follows long-standing HMRC guidance often called the Anderson rules. Broadly, premiums may be allowable against corporation tax where the policy is short-term protection taken out purely to cover loss of profits, and the key person is not a significant shareholder. Where premiums have been allowed, a pay-out is typically taxed as a trading receipt; where they have not, the pay-out is usually received without a corporation tax charge. Treatment is decided case by case and depends on the facts, so speak to your accountant before relying on either outcome. We arrange the cover; your accountant confirms the tax position.
Life only, or life and critical illness
Death is not the only risk. A founder off work for a year after a stroke or cancer diagnosis can damage a small business just as badly. Adding critical illness cover typically increases the premium materially but covers the statistically more likely event. Many businesses cover the headline figure on life and a smaller figure on critical illness as a sensible compromise. We model both.
Term, review and exit
Match the term to the period of dependency: the years until succession is in place, the loan is repaid, or the second tier of management is ready. Key person cover should be reviewed whenever the business changes shape, on new funding, new shareholdings, or the key person's role changing. If the person leaves, the policy can usually be cancelled or, with some insurers, transferred.
How Major Money Matters helps
Specific things we do for this product. No generic platitudes.
Size the cover credibly
We work through salary multiples, profit attribution and loan balances with you, and sanity-check the figure against what insurers will accept at underwriting.
Business protection across a number of insurers
We compare insurers on price, critical illness wording and underwriting appetite for the key person's health profile, not just the headline premium.
Coordinate with your accountant
We set the policy up and supply the documentation your accountant needs to take a view on premium deductibility under the Anderson rules.
Review as the business changes
New borrowing, new investors, new key hires. We review the cover at each change so it keeps matching the real exposure, wherever possible with the same adviser throughout.
Frequently asked questions
Who owns a key person policy?
The business. The company is the policyholder, pays the premiums and receives the pay-out. The insured individual signs consent but has no claim on the proceeds. This is different from relevant life cover, where the pay-out goes to the employee's family.
Are key person insurance premiums tax-deductible?
Sometimes. HMRC's long-standing guidance (the Anderson rules) broadly allows relief where the policy is short-term, covers loss of profits only, and the key person is not a significant shareholder. It is decided on the facts of each case, so confirm with your accountant before assuming relief.
Is the pay-out taxed?
Often, yes. Where premiums have been treated as deductible, the proceeds are typically taxed as a trading receipt. Where they have not, the pay-out is usually free of corporation tax. The two halves tend to mirror each other, but the position should be confirmed with your accountant, ideally before the policy starts.
Can key person cover include critical illness?
Yes, and for many small businesses it should. A serious illness that takes a founder out for a year is more likely than death at most working ages. Adding critical illness raises the premium, so many firms insure a smaller sum on illness than on death.
What happens if the key person leaves the business?
The business can usually cancel the policy, since the insurable interest has ended. Some insurers allow the policy to be transferred to the individual or to a new employer. We check the options at outset so you are not locked in.
Can a sole trader take out key person cover on themselves?
A sole trader and the business are legally the same person, so cover on your own life is simply personal life insurance, best written in trust for your family. Key person structures apply to limited companies and partnerships insuring someone else's economic value to the firm.
Related
Other protection products that often pair with this one.
Shareholder protection
Life cover plus a cross-option agreement so surviving shareholders can buy a deceased shareholder's equity and the family gets fair value, quickly.
Read moreBusiness loan protection
Life cover shaped to business borrowing, so debts are cleared rather than called in if the person behind them dies or falls seriously ill.
Read moreRelevant life cover
Company-paid life cover for a director or employee, paid out to their family via trust. Often a tax-efficient swap for personally paid life cover.
Read moreWhat our clients say
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Work out your key person exposure
Book a quick 15-minute call with Ollie Allen or one of the Major Money Matters protection team. We will identify who the business genuinely cannot trade without, size the cover and obtain quotations from insurers available through our panel.
We aim to return your call as quickly as we can. Mon to Fri 9am to 5pm, weekend appointments on request.