Do I Need Key Person Insurance?

What Is a Key Person?

A key person is anyone whose death or serious illness would have a significant financial impact on your business. This is not just the managing director — it could be a top salesperson, a technical specialist, a key account manager, or anyone whose skills, relationships, or knowledge are difficult to replace quickly.

The test is simple: if this person were gone tomorrow, would the business suffer financially? If the answer is yes, they are a key person.

Signs Your Business May Need Key Person Cover

• One person generates a disproportionate share of your revenue
• A key employee holds critical client relationships
• Your business has specialist technical knowledge concentrated in one person
• You have a bank loan or overdraft that a lender might call in if a key person died
• Losing one person would trigger a significant recruitment and training cost
• Your business would struggle to fulfil contracts without a specific individual

What Does Key Person Insurance Pay Out For?

Key Person Insurance pays a lump sum directly to the business if the insured person dies or (if critical illness cover is included) suffers a specified serious illness. The business can use the money for:

• Covering lost profits during the period of disruption
• Funding the recruitment and training of a replacement
• Repaying business loans or overdrafts
• Reassuring clients, suppliers, and lenders that the business is financially stable
• Buying time to restructure or find a buyer if the business cannot continue

How Much Cover Do You Need?

There is no single formula — the right amount depends on what the cover is intended to do. Common approaches include:

• Multiple of profit contribution: typically 2–5× the key person's contribution to annual profits
• Multiple of salary: typically 5–10× the key person's salary, to cover recruitment and lost productivity
• Loan repayment: equal to the outstanding balance of any business loans the key person has guaranteed

We can help you work through the right approach for your business.

Tax Treatment

The tax treatment of Key Person Insurance depends on the purpose of the cover and how the policy is structured. HMRC's approach is set out in its Business Income Manual. In general:

• If the policy is taken out to protect against loss of profits, premiums may be treated as a trading expense and the payout may be taxable as a trading receipt
• If the policy is taken out to protect against a capital loss (such as loan repayment), premiums are generally not deductible and the payout is generally not taxable

The tax position is not always straightforward. We recommend seeking independent tax advice alongside protection advice.