What Is Key Person Insurance and Does Your Business Need It?

Key person insurance is cover a business takes out on someone whose skills, relationships, or knowledge are central to how it makes money — often an owner, director, or a top performer. If that person could no longer work because of death or serious illness, the payout helps the business absorb the shock and keep going while it adjusts.

What does key person insurance actually cover?

The policy is designed to protect the business, not the individual personally. Depending on how it is set up, it can provide a lump sum or income to help replace lost profit, cover the cost of recruiting and training a replacement, reassure lenders and suppliers, or simply give the business breathing room to make decisions calmly rather than under pressure.

Who counts as a “key person”?

A key person is anyone the business would genuinely struggle to operate without, at least in the short term. In a small business that is often a founder or director who holds the client relationships and does much of the work. In a larger one it might be a specialist, a senior salesperson, or someone with hard-to-replace technical knowledge. The test is practical: what would actually happen to revenue if they were suddenly out of action?

How is the amount of cover worked out?

There is no single formula. Businesses commonly look at the person’s contribution to profit, the cost and time involved in replacing them, and any loans or obligations that depend on them. The aim is a figure that genuinely reflects the financial gap their absence would create, rather than a round number, so it is worth working through with your adviser and accountant.

Who owns the policy and who receives the payout?

Key person cover is usually owned by the business, which also pays the premiums and receives any payout. That structure is what allows the money to flow to where the financial impact is felt. Getting the ownership right matters, and it is closely tied to your business structure, so it is one of the details worth confirming carefully when the cover is set up.

Is key person insurance tax deductible?

The tax treatment depends on how the policy is structured and what it is for, and it is an area where general rules do not always give you the answer for your specific situation. Because the deductibility of premiums and the treatment of any payout can vary, this is a question to put to your accountant or tax specialist alongside setting the cover up.

If you would like to work out whether key person cover makes sense for your business and how it might be structured, you are welcome to get in touch for a no-obligation conversation.

The information in this article is general information only and is not intended as financial, legal, tax or other advice. It does not take into account any individual’s or business’s situation or needs. You should consider obtaining professional advice from a financial adviser, accountant and/or lawyer in relation to your own circumstances and before acting on this information.