What key person insurance does
Key person (or 'key man') insurance pays the business a lump sum if a vital individual — whose skills, knowledge or relationships drive profit — dies or becomes seriously ill. It buys time and money to recruit, recover lost revenue or repay debts. The best policy reflects that person's true value to the business.
1. Cover for a key director or owner
Protects against losing the person who drives the business. Best for owner-managed companies reliant on one or two individuals — the lump sum keeps the business stable while it adapts.
2. Cover for a key employee
Protects against losing a non-owner whose skills or client relationships are critical (e.g. a top salesperson or technical expert). Best for businesses with revenue concentrated around specific staff.
3. Calculating the right cover
Cover is often based on a multiple of the person's salary or their contribution to profit, plus any debts they guarantee. Best set realistically — enough to cover lost profit and replacement costs without over-insuring.
4. Key person cover with critical illness
Adding critical illness means the policy also pays if the key person survives a serious illness but can't work. Best for fuller protection — serious illness is more likely than death during working years.
Setting it up well
- Identify who is genuinely 'key' to profit
- Calculate cover from salary multiple or profit contribution
- Consider adding critical illness
- Understand the tax treatment (the 'Anderson principles') — take advice
How to find the best key person cover
A protection specialist can value the cover correctly and set it up tax-efficiently. Find a protection specialist through Nesto — free, no obligation.
Frequently asked questions
What is key person insurance?
Cover that pays your business a lump sum if a vital individual dies or becomes seriously ill, helping it absorb the financial loss.
Who counts as a key person?
Anyone whose skills, knowledge or relationships drive profit — often an owner, director, top salesperson or technical expert.
How much cover do I need?
Often a multiple of salary or their profit contribution, plus any debts they guarantee — enough to cover lost profit and replacement.
Is key person insurance tax-deductible?
Sometimes the premiums are an allowable expense (and the payout taxable) under HMRC's principles — take advice on your situation.
Should I add critical illness?
Worth considering — it pays if the key person survives a serious illness but can't work, which is more likely than death during working years.