What key person insurance is
Key person (or "keyman") insurance is life cover — often with critical illness added — taken out and paid for by a business on the life of someone the business can't easily do without. If that person dies or is diagnosed with a serious illness, the policy pays the business a lump sum.
The payout buys survival time: covering lost profit while the business adapts, funding recruitment of a replacement, reassuring lenders and customers, or repaying borrowing the key person guaranteed.
Who counts as a key person?
Anyone whose loss would materially dent revenue or capability: founders and managing directors, a top salesperson holding the client relationships, the technical expert behind the product, or a director who has personally guaranteed business debt. A useful test: whose six-month absence would force the business to change its plans?
How much cover should the business buy?
Two standard sizing methods: a multiple of salary (commonly 5–10×), or a profit-based calculation (for example, twice gross profit attributable to the person, spread over the recovery period). Add any debt they've guaranteed — lenders sometimes require exactly this. Term length usually tracks the person's expected tenure or the loan term.
Tax treatment
Tax hinges on HMRC's long-standing principles: where the policy is short-term, purely to cover loss of profits, and the company is the beneficiary, premiums may be an allowable expense — but then payouts are usually taxable as trading receipts. Where premiums aren't relieved, payouts are generally received tax-free. The right structure depends on purpose, so take advice rather than assuming either treatment.
Related cover worth knowing
Key person insurance protects the business's P&L. Two siblings do adjacent jobs: shareholder/partnership protection funds surviving owners to buy a deceased owner's share, and relevant life cover provides tax-efficient personal life cover for directors and staff. Many firms need two of the three.
Getting the right policy
A protection specialist will size the cover, structure it for the right tax outcome, and place it competitively. See best key person insurance, or find a protection specialist through Nesto — free, no obligation.