What is key person insurance?

Key person insurance (also called keyman insurance) is a life insurance or critical illness policy taken out by a business on the life of a crucial employee, director, or partner. If that person dies or becomes critically ill, the policy pays out a lump sum to the business — not to the individual or their family. The payout helps the business survive the financial impact of losing a key individual, covering lost revenue, recruitment costs, loan repayments, or even allowing an orderly wind-down.

How much does key person insurance cost?

Premiums depend on the type of cover (life only or life + critical illness), the sum assured, the age and health of the key person, the policy term, and whether the key person smokes. As a rough guide: life-only cover for a healthy non-smoking 35-year-old with £500,000 cover over 10 years might cost £15–£30 per month. Adding critical illness cover roughly doubles or triples the premium. Policies for older individuals or those with health conditions cost more. It's a business expense and relatively affordable compared to the risk it protects against.

Is key person insurance tax deductible?

HMRC's treatment depends on the purpose of the policy. If the policy is to cover loss of profits (i.e., the key person generates revenue and the policy compensates the business for that lost revenue), premiums are generally tax deductible as a business expense, BUT the payout is taxable as trading income. If the policy is to protect a business loan or repay a shareholder, it's typically NOT tax deductible, but the payout is not taxable either. The distinction can be complex — HMRC's Business Income Manual (BIM45525) sets out the rules. Get advice from your accountant.

How much cover do I need?

Common methods for calculating the sum assured include: multiple of the key person's salary (5–10× annual salary), multiple of gross profit attributable to the key person, cost to recruit and train a replacement plus lost profits during the transition period, or the value of outstanding business loans that depend on the key person. For a small business where one person generates most of the revenue, 2–5 years of gross profit is a common benchmark. An insurance broker or financial adviser can help model the right amount.

Key Person Insurance Guide UK — Protecting Your Business | PocketWise

If your business depends on one or two key people, key person insurance protects against the financial impact of losing them.

At a Glance

Feature	Detail
What it is	Life and/or critical illness cover on a key employee, director, or partner
Who takes out the policy	The business
Who receives the payout	The business (not the individual or their family)
What it covers	Financial loss from death or critical illness of a key person
Typical cover amount	£100,000–£2 million+
Policy term	Usually 5–25 years (matched to business planning horizon)
Cost	From £10–£100+ per month depending on cover and risk factors

What Does It Cover?

Purpose	How the payout helps
Lost revenue	Replaces income the key person generated while you find/grow a replacement
Recruitment costs	Pays for headhunters, training, onboarding
Loan repayment	Repay business loans that banks may call in without the key person
Investor/shareholder protection	Reassures investors the business can survive
Business wind-down	Covers costs of an orderly closure if the business can’t continue
Client confidence	Demonstrates the business has contingency planning

Who Needs It?

Business type	Why
Owner-managed businesses	If you’re the owner AND the main revenue generator
Partnerships	Loss of a partner could cripple the firm
Businesses with key salespeople	One person responsible for major client relationships
Businesses dependent on technical expertise	Specialist knowledge that’s hard to replace
Businesses with outstanding loans	Banks may require key person cover as a loan condition
Start-ups with few employees	Losing one of two founders could end the business

Types of Cover

Type	What happens	Premium	Payout
Life only	Pays if key person dies	Lower	Lump sum
Critical illness only	Pays if key person is diagnosed with a specified critical illness	Moderate	Lump sum
Life + critical illness	Pays on death or critical illness (whichever comes first)	Higher	Lump sum

Common Critical Illnesses Covered

Illness
Cancer
Heart attack
Stroke
Multiple sclerosis
Kidney failure
Organ transplant
Major surgery (e.g., coronary artery bypass)
Loss of limbs
Blindness / deafness

The exact list varies by insurer. Check the policy wording carefully.

How Much Cover Do You Need?

Method	Calculation
Multiple of salary	Key person’s salary × 5–10
Gross profit method	Gross profit attributable to key person × number of years to recover
Replacement cost	Recruitment + training + lost revenue during transition
Loan cover	Outstanding business loan amount

Example Calculation

Factor	Amount
Key person’s salary	£80,000
Revenue they personally generate	£300,000/year
Time to recruit and train replacement	12 months
Estimated lost revenue during transition	£200,000
Recruitment costs	£30,000
Recommended cover	£200,000–£500,000

Typical Costs

Key person age	Cover	Term	Monthly premium (approx.)
30, non-smoker	£250,000 life only	10 years	£8–£15
35, non-smoker	£500,000 life only	10 years	£15–£30
40, non-smoker	£500,000 life + CI	10 years	£50–£90
45, non-smoker	£500,000 life only	10 years	£30–£50
50, non-smoker	£1,000,000 life + CI	10 years	£150–£300

Prices are illustrative. Actual premiums depend on health, occupation, and insurer.

Tax Treatment

Scenario	Premiums	Payout
Cover for loss of profits (replaces revenue)	Generally tax deductible as a business expense	Taxable as trading income
Cover to repay a business loan	NOT tax deductible	NOT taxable
Cover to protect shareholders	NOT tax deductible	NOT taxable

Key HMRC guidance: Business Income Manual BIM45525.

Important: The tax treatment depends on the specific purpose and structure of the policy. Always get advice from your accountant before assuming deductibility.

How to Set It Up

Step	Action
1	Identify your key person(s) — who would the business struggle without?
2	Calculate the cover amount needed
3	Choose the type of cover (life, critical illness, or both)
4	Get quotes from multiple insurers (use a broker)
5	The business applies for the policy and pays the premiums
6	The key person completes a medical questionnaire
7	Policy is issued in the business’s name
8	Review annually — update cover as the business changes

Key Person Insurance vs Other Business Protection

Type	What it protects	Who benefits
Key person insurance	Business against loss of a key individual	The business
Shareholder protection	Remaining shareholders if one dies	Surviving shareholders (buy deceased’s shares)
Partnership protection	Remaining partners if one dies	Surviving partners
Relevant life insurance	Employee’s family (tax-efficient death-in-service)	Employee’s family
Personal life insurance	Individual and their family	Family

Common Mistakes

Mistake	Impact
Not having any cover	Business collapses if key person dies or is critically ill
Under-insuring	Payout doesn’t cover the actual financial loss
Not reviewing regularly	Cover becomes outdated as the business grows
Wrong tax treatment	Claiming deductions you’re not entitled to — HMRC penalties
Not telling key person	They need to consent and complete medical disclosures
Only covering death	Critical illness is more common than death before retirement age

Key Person Insurance Guide UK — Protecting Your Business

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