Key Person Insurance

For the unthinkable

Key Person Insurance

Key person insurance isn’t something you want to think about. Many businesses rely on key person insurance to protect their most valuable employees, whose knowledge or skills are crucial to the company’s success and continuity. And we hope you’ll never need to make a claim. But you don’t want to be worrying about finances at a time of loss. So putting key person insurance in place acts as a safety net, helping to prevent financial loss and allowing you to focus on supporting your employees during times of turmoil.

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What is Key Person Insurance?

Key Person Insurance is a life insurance policy for anyone who contributes to the profitability of your business. A key person can be a key employee, key individual, or essential employee, such as a business owner, company director, or other key people whose skills are vital to the business. It allows you to claim financial support when your business is missing an important member of staff, helping to maintain customer confidence and reduce the impact on colleagues.

Companies often take out a key person insurance policy (also known as key man insurance or key woman insurance) to protect against the loss of business key people. The policy is designed to compensate for the key person’s contribution to the company’s success and to help maintain business continuity if a key member or key individuals are lost.

A common misconception is that Key Person Insurance only covers death. But you can also get insurance for terminal illness, permanent disability, and critical illness. Critical illness cover and specified critical illness can be included in the policy to protect the business if the insured person is diagnosed with a serious illness.

“It’s awful to contemplate but worth taking a moment to reflect on how your business would cope if you lost a key member of staff.”

– Simon Claxton, financial services specialist at Macbeth

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It’s ok to want to protect your business from the unthinkable

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How Key Person Insurance protects your business

It can seem callous to talk about the effect of losing someone on your business. Afterall, people are more important than finances, right?

But in the event of a tragedy, there are all the other people in your business to consider too. People who are affected by the loss, but also worried about their jobs. Because losing a key person can impact profitability, financial backing and expansion opportunities.

Key Person Insurance provides a cash injection when morale is low and your business needs a boost, to protect your brand and the reputation you’ve worked so hard to build.

Questions about Key Person Insurance?

Protect your biggest asset

Insure the people who make your business successful
Choose cover to suit your circumstances

Choose who to insure and how long they’re insured for
Receive a cash lump sum

Maintain the value of your company and confidence in the business with a cash injection
Cover your debts

Pay off bank loans or debts that may mount up while you’re missing a key person
Recruitment and training

Recruit and train a replacement or pay for temporary staff

Why Key Person Insurance Is Important

Many UK companies use key person insurance to protect against financial losses caused by the death, serious illness, or long-term absence of a key employee or director.

Losing a key person can significantly impact profits, cash flow, business continuity, and reputation. A key person insurance policy typically pays a lump sum to the company, helping cover costs such as lost profits, recruitment expenses, and interim cover to keep the business running.

The cost of key person insurance depends on factors such as the insured individual’s role, age, health, and contribution to the business, as well as the amount and type of cover selected. Adding critical illness cover usually increases the premium and may be underwritten separately.

Companies should also assess the tax treatment of key person insurance. Generally, premiums are not tax-deductible if the payout is for protecting profits (i.e. if the benefit is a capital receipt), but they may be deductible if the policy is purely to cover temporary replacement or loss of trading income. The tax status of both premiums and payouts depends on the policy’s purpose and should be reviewed with an accountant or tax advisor.

Key person insurance is usually only available to limited companies and partnerships, not sole traders, because the policy is designed to protect a business from the loss of someone who contributes materially to its success. There must be a clear financial relationship between the business and the insured individual.

Why you should consider Key Person Insurance

According to Legal and General research, 52% of SMEs would cease operating in under a year if they lost a key person.
The chance of a heart attack or cancer before retirement age is greater than the risk of fire or flooding. Yet, many companies insure against water damage or a building burning down but overlook key person insurance.
Many venture capitalists insist on Key Person Insurance before they will invest.
Losing a key person can make banks nervous and may prompt them to freeze or call in existing loans. Clients and suppliers may also start to question your ability to deliver, reducing confidence in your brand.