Key Person Cover

How does key person cover differ from relevant life cover?

Relevant life is a payout on death. These policies are again structured slightly differently. They still pay out on death, but the business pays the premium. Crucially, the payout goes into Trust for the beneficiaries of the individual – typically their partner and children.

A key person policy pays out to the business, so if funds are later extracted personally from the business, there may be tax implications depending on how that is done. But a relevant life plan is paid into Trust so the individual’s family can access it.

We often set up shareholder, key person and relevant life cover for the same individuals in a business, because they are structured to meet different objectives.

Is key person cover essential for all businesses or only certain types?

It’s not sector specific or anything like that. It’s more about whether a business relies on a key person or not.

In the SME space, and especially micro-SME companies, you will usually be reliant on one or two key people. You haven’t got to the size where you can diversify that risk.

As you grow and gain more employees, you may not have a key person anymore. Is there a key person at one of the major banks in the UK? I’m sure they’re very valuable to the company and do great work, but thousands of other people can step in if needed.

It’s down to size and reliance on at least one key individual – and where in the business cycle you are. Early on, companies want to be sure they can survive without that person. Later, perhaps the two founders have to stay in the business for a couple of years after exit as an earn-out period.

If one dies and the other survives, the earn-out figures may not be met because the financials don’t meet the triggers. Key person cover can cover that gap.

How do I accurately calculate the required level of key person cover?

Sometimes we see clients whose previous brokers put this in place, and just used a multiple of income. Quite commonly, this is five times income for a life-only policy.  But this doesn’t really mitigate the risk of someone becoming ill with cancer or another serious condition.

We look at different metrics and rationalise it that way. What would it look like day-to-day if you were to lose a key person?  Would you recruit someone or just cover lost profits? Is there even a financial risk to you? There’s no point paying for a risk that’s not there.

Once we’ve established if there is a key person and the impact to the business of losing them, we look at a realistic timeframe to recruit a replacement. It’s often six months to a year at a senior level, as notice periods can be three months or longer.

Once the new person joins, they need to learn the business and your procedures, as they will probably differ from where they were before.

We’ll also look at the value of that person. You might have a two-person business where one person goes out and gets all the contracts, but relies on the other for delivering the work.

You can probably replace that back-office person with a salary. If they earn £100,000, we can look at a multiple of that.

The other person is perhaps more responsible for gross profit. That highlights the difference. If it’s an HR director or a finance director, there are lots of good people in those roles and you could find a good replacement.

But if you’ve worked in your industry for 30 years, have hundreds of contacts and intimate knowledge of how everything works, you’re not easily replaceable. It’s loss of gross profit that’s of more concern for the business. We’ll explore that to set a recommended level of cover and timeframe.

What are the different types of key person cover?

There are three types of key person cover. Two are much more common than the other.

The first is just life insurance. It pays out if you die – it’s very straightforward. The second is critical illness cover, which pays out on diagnosis of some forms of cancer, stroke, heart attack, Multiple Sclerosis… the list is long. Effectively, if the critical illness diagnosis qualifies under the insurance terms and conditions, you would get a lump sum into the business.

The third option is only available from two providers as we speak today in April 2026. It’s called Key Person Income Protection. This can only run for a year or two and the term is 20 years – but obviously that could potentially change in the future.

Here, we look at the gross profit this person brings in, and how to replace that amount in the short term to make sure the business succeeds. It buys time to hire a replacement person or make some cuts to keep the business viable.

Who pays the premiums and who owns the policy?

The premium is paid by the business, and the business owns the policy. The insured life is an individual, but it’s business cover.

What is the maximum term for a key person cover policy?

There are different interpretations of this. Generally speaking, it’s about how long that person will be key within the business.

If you’re going to sell your company in five years, they are probably only key for those five years. If you want to grow the business for 20 years and then hand it down to your children,  20 years’ cover is more appropriate.

Whilst you can take cover for five years and then get another five-year policy after that, as you get older, things start to go wrong. You might not be able to take a new policy if you’ve had adverse medical disclosures in the meantime. It’s better to put it in place for a timeframe that reflects your future plans.

Can the policy cover more than one key person?

The policies are individual, so if you’ve got multiple key people, you’ll have multiple policies.

What happens to the policy if the key person leaves the business?

At the time we’re recording today in April 2026, these policies are effectively pay-as-you-go arrangements. You’re in a contract for a period of time, but there are typically no exit penalties.

When a key person hands their notice in, you would tell us and we either arrange for cover to end when they leave, or we cancel it because they’re not key anymore.

Are key person cover premiums considered an allowable business expense for corporation tax purposes?

It depends on whether the cover is wholly exclusively for the business, or to cover debt and the shareholding of the individual. It could potentially be an allowable expense.

You’ve demonstrated this throughout, but how can a business protection advisor help?

We help clients really understand the risk and quantify it – because there’s no simple consensus about what this should look like.

We’ve helped a lot of clients who’ve gone through investment rounds where the investors have required key person cover as part of the deal. But they haven’t quantified who needs the cover, the amount or how long it runs for. Those decisions can make a big difference to both the effectiveness of the policy and the premium.

We can go out to the whole market, which ensures that the product you’re getting is the most suitable one for you. When you look at a comparison site, it’s all ranked by cost, but it doesn’t really explain the differences or offer any advice.

Quality has a massive impact on cost, but if you understand the differences, you might be willing to pay more for the value of the product.

Also, if in-depth medical underwriting is involved, we may need to place you with a different insurer to offer the best terms. A broker won’t just highlight the need and calculate the cover – we also make sure that the policy is the most appropriate one.

Key Takeaways:

• Key person cover acts as a wrapper for life insurance, critical illness cover, and income protection, with the goal of protecting the business from the financial consequences of losing a key individual.
• The primary purpose of the payout is to ensure the company has a financial safety net by providing funds for recruiting a replacement, supporting internal promotions, or covering lost contracts and profits.
• A key person is defined by the client as an individual (such as a founder, CEO, or long-term subject matter expert) whose extended absence would have serious operational and financial implications for the company, making it crucial for micro-SMEs.
• Accurate cover calculation should be based on factors like the potential loss of gross profit and the realistic timeframe (often six months to a year) needed to recruit and train a replacement, rather than simply using a multiple of the person’s income.
• This type of cover is distinct from shareholder protection (which facilitates share buybacks for succession planning) and relevant life cover (which pays into a Trust for the individual’s family), as key person policy proceeds go directly to the business.
  
  

Business protection policies are subject to underwriting, policy definitions, exclusions, and insurer terms and conditions. Tax treatment depends on individual circumstances and may change in future. Business Protected does not provide legal or tax advice. For specialist tax advice, please refer to an accountant or tax specialist.