Protect the people
your business runs on.

What is key person insurance?

Key person insurance, sometimes called key man insurance, is life cover, often with critical illness cover added, taken out by a business on an employee, director or owner whose contribution is central to its profits.

The structure is straightforward and matters: the company is the policyholder, the company pays the premiums, and the company is the beneficiary. This is not personal cover for the individual's family. It is a corporate asset designed to keep the business solvent through a period when its earnings capacity has been damaged.

Most businesses insure their premises, their stock and their liabilities without a second thought, then carry no cover at all against the loss of the person who actually generates the income.

How to value a key person

There is no single formula, and any adviser offering one is oversimplifying. The practical approaches used in the market are:

Multiple of profit contribution. Estimate the proportion of gross profit attributable to the individual and multiply by the number of years the business would realistically take to recover, commonly two to five.

Multiple of salary. A rougher method, typically five to ten times remuneration. Quick, but it understates cover for a rainmaker on a modest salary and overstates it for a well-paid administrator.

Cost of replacement. Recruitment fees, a premium salary to attract a replacement quickly, training time, and the revenue lost while they get up to speed.

The right number usually emerges from discussing all three rather than picking one. Underinsuring is the common error: the cover looks affordable at outset and turns out to be irrelevant when it is needed.

Who should the policy cover?

Ask a blunt question about each individual: if this person did not come to work again from tomorrow, what happens to our revenue over the next two years?

The obvious candidates are the founder or managing director, a salesperson responsible for a large share of turnover, and the holder of a technical skill or accreditation the business trades on. Less obvious but often just as critical is the person who holds the key client relationships, where the client relationship may leave with them.

In smaller companies the same individual is frequently key for several reasons at once, which usually points to more cover rather than less.

The tax position

The general principle applied by HMRC is known as the Anderson rules. Where the policy is on an employee, for a term no longer than their expected service, and is intended purely to replace lost profits, not to provide a capital asset or protect a loan, premiums may be treated as an allowable business expense, and the payout is then usually taxable as a trading receipt.

Where those conditions are not met, most commonly when the person is a substantial shareholder or the cover relates to a loan, premiums are typically not deductible and the proceeds may not be taxable. The two sides tend to follow each other.

This is genuinely fact-specific and worth getting right at the outset with your accountant. Tax treatment depends on your individual circumstances and may change in the future.

How a claim is paid

The insurer pays the company directly, since the company owns the policy. There is no trust involved, which is the main structural difference from shareholder protection, where the money needs to reach individuals.

Because the funds land in the business, the directors decide how to use them, recruitment, servicing debt, covering fixed costs through a lean period, or simply steadying the balance sheet while confidence returns.

Cover Your Family is not FCA regulated and does not arrange policies. A separate, FCA-regulated adviser will size the cover, structure it correctly and place it with an insurer, at no cost to your business.