Key person insurance for directors, paid for by the company

Key person insurance for directors is a policy the company takes out on a director it relies on, so it has money for lost profit, recruitment or a loan (Legal & General ↗).

HMRC describes it as cover an employer takes out in its own favour against loss of profits if a director or other key person passes away, or has a critical illness, sickness, accident or injury (HMRC ↗).

The company owns it and is paid (Royal London ↗).

Every claim here is our summary of a named external source, linked beside it. Sources change: check the wording at the link before you rely on it.

Why directors ↓Versus shareholder protection →

01 · Why

Why directors need key person insurance

Legal & General says that if you own a business, for example as a limited company director, you can take out key person insurance with the agreement of the person covered (Legal & General ↗).

Its list of roles typically covered starts with the owner or founder and the CEO.

Royal London says that sometimes the majority shareholder and figurehead is plainly the only key person, and in other cases a director may be key despite being only a minority shareholder (Royal London ↗).

What a payout could help with

Loss of profits
Having to recruit or train a replacement
Losing personal or business contacts the key person kept up
Loss of goodwill, which can affect raising capital or attracting investors
Customers and suppliers losing confidence in the business
Outstanding loans

Summarised from Legal & General's list of what a payout could help with (Legal & General ↗).

02 · How much

How much cover a director needs

Royal London calls profit the main way to value a key person (Royal London ↗).

Legal & General routinely averages the last 2 years' profit (Legal & General ↗).

Cover can also be set at a loan the business would need to repay if the key person passed away (Legal & General ↗).

For a director, two details matter.

Scottish Widows counts dividends in total remuneration (Scottish Widows ↗), and Royal London says total life cover should not exceed the greater of 10 times the salary package or 5 times average net profit (Royal London ↗).

Royal London also warns that for shareholding directors, pay may not reflect their worth to the business (Royal London ↗).

Key person insurance calculator →

Net profit that depends on the key person (an example; change it)

Their share of profit£60,000

Royal London up to 5× net profit£300,000

Legal & General up to 5× attributable net profit£300,000

Zurich up to 5× profit, life cover£300,000

The most each insurer's published multiple would consider, applied to your figure. It is a ceiling, not a recommendation: underwriting sets the real limit. No premium is shown: a price needs an insurer's underwriting. Check the current multiple at each source: Royal London ↗ · Legal & General ↗ · Zurich ↗.

03 · Compared

Director key person insurance vs shareholder protection

A director who owns shares raises two questions: what the company loses, and who ends up with the shares.

Key person cover answers the first.

Shareholder protection answers the second, usually with a cross option agreement that gives the survivors the option to buy the shares (Royal London ↗).

Relevant life cover answers a third: the director's family (Royal London ↗).

Shareholder protection →Key person vs shareholder protection →Key person vs relevant life →

This page

Key person insurance

Shareholder protection

Relevant life cover

Pays

The company (Royal London ↗)

The surviving shareholders, to buy the shares (Royal London ↗)

The director's family, through a trust (Royal London ↗)

Owned by

The company (Royal London ↗)

Each shareholder, in business trust (own-life) (Royal London ↗)

Trustees (Royal London ↗)

For

Lost profit, recruitment, a loan

Keeping ownership with the people running it

A death benefit for dependants

Swipe to compare

04 · Tax

Tax treatment for director key person cover

HMRC allows the premiums only if the sole purpose is meeting a loss of trading income (HMRC ↗) and a life policy is term cover with no other benefits (HMRC ↗).

For directors the shareholding is the sticking point: HMRC says a policy on directors who are major shareholders, but not other employees, may have a non-trade purpose (HMRC ↗), such as protecting the value of the director's shares and estate (HMRC ↗).

Royal London says working directors can be treated as employees, but not shareholding directors (Royal London ↗).

Legal & General's rule of thumb is a shareholding under 5% (Legal & General ↗).

Where premiums were deductible, the payout is trading income (HMRC ↗).

Key person insurance tax guide →

Working director, no shares

Minority shareholder

Major shareholder

Premium relief

Possible, if the conditions are met (Royal London ↗)

An inspector may accept it (Royal London ↗)

A non-trade purpose is possible (HMRC ↗)

Payout

Trading income if premiums were deducted (HMRC ↗)

If premiums were not deducted, generally not trading income, with no assurance (HMRC ↗)

Benefit in kind

None while the company owns it (Royal London ↗)

Swipe to compare

Summarised from HMRC's manual and Royal London's guide. Whether the conditions are met is a question of fact (HMRC ↗); ask your accountant.

05 · Arranging

How to arrange key person insurance for directors

The company applies and owns the plan; the director agrees, signs as the person covered and answers the health questions (Royal London ↗).

Answer fully: the ABI names failing to disclose existing medical conditions as a common reason claims are declined (ABI ↗).

Key person insurance for limited companies →

Identify

Which directors the profit depends on

Shareholding is not the test; loss of profit is.

Size

Put a number on the loss

Profit or earnings, with the multiples insurers publish.

Purpose

Be clear why the company is buying it

Lost profit and a loan are treated differently for tax.

Apply

The company applies; the director signs

As the person covered, answering the health questions fully.

Check

Use an authorised firm

The FCA tells consumers to check a firm on its Firm Checker first.

Sources: Royal London (Royal London ↗), HMRC (HMRC ↗), the FCA (FCA ↗).

06 · Claims

Claims, and how they pay

The ABI named two common reasons claims were declined: existing medical conditions not disclosed, and policy definitions not met (ABI ↗).

Full, accurate answers on the application deal with the first.

of new individual protection claims paid in 202497.9%

ABI (ABI ↗)

group and individual protection claims paid in 2024£8bn

ABI and GRiD (ABI ↗)

Figures for all individual and group protection, not key person cover alone.

08 · Sources

Check it for yourself

Every claim on this page is our summary of one of the documents listed here.

We last checked them against the live sources on 28 September 2026.

The documents are the authority, not this page.

Insurers and HMRC update them, so validate any figure or condition at its link before you rely on it.

Questions

Director key person cover, answered

No. Key person cover is for someone whose loss would cost the business profit.

Legal & General says the business must be able to show a loss of profits in the key person’s absence to insure them.

Royal London says a key person is anyone whose absence, through death or disability, would have a serious effect on the company’s future profits, and that shareholding is not necessarily a good indicator. Legal & General ↗

There is no fixed answer.

Royal London’s normal multiple is 5 times the net profit related to the key person, or up to 10 times gross salary for life cover, and it says total life cover should not exceed the greater of the salary-package and profit figures.

Scottish Widows counts dividends in a director’s remuneration.

The calculator works through each method. Royal London ↗

Only if HMRC’s conditions are met: the sole purpose is meeting a loss of trading income, and a life policy is term cover with no other benefits.

HMRC says a policy on directors who are major shareholders, but not other employees, may have a non-trade purpose.

Legal & General’s rule of thumb is that relief should be available where the shareholding is under 5%; HMRC states no percentage. HMRC BIM45530 ↗

Key person insurance is owned by the company and pays the company, for lost profit, recruitment or a loan.

Shareholder protection is about ownership: a cross option agreement gives the surviving shareholders the option to buy a shareholder’s shares from their personal representatives, and life cover funds the purchase. Royal London ↗

Beta · information only

Put a number on it, before you speak to anyone.

The key person insurance calculator works through the earnings, profit and loan methods, with the multiples UK insurers publish.

01Earnings, profit and loan methods

02Insurers’ published multiples, with sources

03No email, no quote, no sales call

Information, not advice

We are not an insurer, broker or regulated adviser, and we do not give quotes or recommend a policy. For regulated advice, use an adviser authorised by the FCA.

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Not financial advice. This page is general information. Before buying insurance, the FCA tells consumers to check the firm on its Firm Checker (FCA ↗). For free guidance, see MoneyHelper.