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Key person insurance protects your business financially if a founder, director or another vital team member dies or is diagnosed with a critical illness. Here's how it works, what it typically costs, and how it's taxed.
Key person insurance is a life insurance policy, sometimes combined with critical illness cover, that a business buys to protect itself against the death or serious illness of an employee, director or owner whose loss would cause serious financial harm.
The payout is designed to help the business cover lost profits, recruitment and training costs, or outstanding business debt linked to that person, giving the company time and money to recover.
Key person insurance is a life insurance policy, often combined with critical illness cover, that a business takes out on an individual whose death or serious illness would cause significant financial harm to the company. Rather than protecting the individual, it protects the business itself: the company pays the premiums, owns the policy and receives the payout.
The 'key person' is usually a founder, director, technical specialist or top salesperson, though it can be anyone whose skills, knowledge or client relationships the business depends on disproportionately. It's one part of a wider business insurance guide covering how different policies protect a growing company against different risks.
A key person is anyone whose knowledge, skills, client relationships or leadership the business depends on so heavily that losing them would put revenue, contracts or day-to-day operations at serious risk. It's about financial impact, not job title or seniority alone.
If the key person is also a company director, it's worth looking separately at directors' and officers' insurance, which covers legal claims made against directors rather than the financial loss of losing a person.
Common examples
Key person insurance works in a similar way to standard life insurance, but the business, not an individual, takes out and benefits from the policy. Here's how the process typically unfolds.
How it works
Identify the key person and the risk
The business works out which individual (or individuals) would cause serious financial harm to the company if they died or became critically ill, and estimates the scale of that impact.
The business takes out the policy
The company applies for cover, pays the premiums and is named as the policy owner and beneficiary. The key person is the 'life assured' but has no financial obligation under the policy.
Cover runs for an agreed term
The policy pays a lump sum to the business if the key person dies, or is diagnosed with a specified critical illness (if that cover is included), within the policy term.
The business uses the payout to recover
Funds are typically used to cover lost profits, fund recruitment and training for a replacement, or repay business debt linked to the key person.
Cover ends when it's no longer needed
The policy usually ends when the key person leaves the business, or when the agreed term expires, whichever happens first.
Key person insurance can be arranged as life cover on its own, or combined with critical illness cover. The type you choose affects both what triggers a payout and, in some cases, how the policy is taxed.
Cover can also be written on an 'own life in trust' basis or a 'life of another' basis. This distinction matters mainly for tax purposes, which we explain in the tax treatment section below.
Business protection
Speak to an advisor about whether life cover, critical illness cover, or both make sense for your key people.
Losing a key person doesn't just create an operational gap. It can hit the business financially in several ways, often at the same time.
Some businesses combine key person cover with income protection for business owners, which protects an owner's personal income if they can't work, rather than protecting the business itself.
Why it matters
Covering lost profit
Replacing revenue or client contracts that were tied directly to the key person's relationships or expertise.
Funding recruitment and training
Covering the cost and time of finding, hiring and training a suitable replacement.
Repaying business debt
Covering loans or finance agreements where the key person's involvement was a factor in the lending decision.
Reassuring lenders, investors and partners
Showing that the business has a plan to survive the loss of a key individual, which can support existing lending or investment relationships.
The business pays for key person insurance. The company takes out the policy, pays the premiums (usually from company funds) and is named as both the policy owner and the beneficiary. The key person named on the policy, the 'life assured', has no financial obligation to pay premiums and no personal claim on the payout, because the cover exists to protect the business, not the individual.
There's no fixed price for key person insurance. Every policy is individually underwritten, and two businesses could pay very different premiums depending on who's covered and how the policy is structured.
The table below shows illustrative profiles only, to give a sense of how cover might be structured for different types of key person. It is not a quote, and actual premiums depend on individual underwriting and vary between insurers.
Businesses often underestimate how long it takes to find and train a replacement for a genuinely key person. When you're working out the sum assured, build in enough cover for a realistic 12 to 24-month transition, not just a like-for-like salary replacement.
For a broader look at how premiums compare across different types of cover, see our guide to business insurance costs explained.
Key person insurance tax treatment depends on how the policy is written and why the business took it out. Under HMRC's guidance, premiums may be treated as an allowable business expense where the cover is solely to protect against loss of profits and meets HMRC's conditions. Where premiums have been tax-deductible, any payout is generally treated as a taxable trading receipt; where they haven't, the payout is generally tax-free.
Treatment also differs depending on how the policy is structured:
Tax treatment depends on your specific circumstances and current HMRC rules, which can change. This is a complex area, and it's worth speaking to an advisor or accountant about how it applies to your business before taking out a policy. For the full guidance, see HMRC's Business Income Manual (BIM45525).
Key person insurance is often confused with shareholder protection and relevant life insurance. All three are types of business protection, but they protect different things and pay out to different people.
If you're weighing up cover for an employee's family rather than the business itself, our relevant life insurance guide explains how that works, and you can compare life insurance providers to see how the two compare on cost and features.
We compare cover across key person, shareholder protection and relevant life insurance.
There's no single formula for the right amount of key person cover. Most businesses base the sum assured on one, or a mix, of the approaches below, and an advisor can help you calculate an appropriate figure based on your business's specific financials rather than relying on a single rule of thumb.
Working it out
Getting key person insurance in place usually follows a similar process, whichever insurer you end up choosing.
Getting started
Identify who needs cover
Work out which key person (or people) the business needs to protect, and whether you need life cover, critical illness cover, or both.
Work out your sum assured and term
Decide on an appropriate level of cover and how long you need the policy to run for.
Compare cover across multiple insurers
Look at options from a wide range of insurers rather than accepting the first quote you're offered.
Get advice on how to structure the policy
An advisor can help you decide whether to write the policy in trust or have it owned by the company, which affects how it's taxed.
Money Saving Advisors compares key person cover across a wide range of insurers, giving you access to expert advice with no pressure to proceed. It's also worth looking at how key person cover fits alongside other types of protection: you can compare the best business insurance providers to see the range of policies available to growing companies.
If you'd like impartial guidance alongside broker advice, MoneyHelper offers free, independent support at moneyhelper.org.uk or on 0800 138 7777.
Common questions
Key person insurance is a life insurance policy, sometimes combined with critical illness cover, that a business takes out on an individual whose death or serious illness would cause significant financial harm to the company. The business pays the premiums, owns the policy, and receives the payout.
In this context, a key person is an employee, director or owner whose knowledge, skills or client relationships are so important to a business that losing them would cause serious financial harm. The life insurance policy is taken out by the business, not the individual, and the payout goes to the company.
The business pays for key person insurance. It's the policy owner and beneficiary, and it pays the premiums, usually from company funds. The key person named on the policy has no financial obligation and no personal claim on the payout.
The purpose of key person insurance is to protect a business financially if it loses someone whose death or critical illness would seriously disrupt operations, profits, or the ability to repay business debt. The payout helps cover lost profits, recruitment and training costs, or outstanding loans linked to that person.
No. There's no legal requirement for businesses to take out key person insurance. It's an optional form of business protection, though some lenders or investors may ask about it as part of due diligence.
Not in the usual sense. Key person insurance is designed to be owned by a business and paid out to that business, which doesn't fit a sole trader's structure in the same way it does for a limited company. Sole traders looking to protect their own income if they can't work are usually better served by personal life insurance or income protection instead.
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