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Key person risk, before it lands
Key person risk, also called key man risk or key personnel risk, is the exposure a business carries when its profits, clients, borrowing or ownership rest on one person.
This guide shows how to spot it, how to reduce it, and where insurance fits.
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.
Source, to check at the link: (Legal & General ↗)
What insurers' rules would consider
Insurers size key person cover from what the person is worth to the business.
The simplest method is a multiple of their pay.
Type a salary to see the most each insurer's published rule of thumb would consider for life cover.
Profit-based and loan-based methods can give a different figure.
The key person insurance calculator works through all three.
What key person risk means
Every small business has people it cannot easily replace: the founder who wins the work, the engineer who knows the system, the director the bank lent against.
Key person risk is the chance that the business has to manage without one of them, after a sudden exit, a serious illness or their passing, and that profits, work or borrowing suffer.
The terms overlap.
Key man risk and keyman risk are the older names.
Key personnel risk is used when several people matter.
Key person dependency is the underlying condition: how much of the business leans on one person.
How to spot key person dependency
Tick each statement that is true of your business today.
The needle measures concentration, not insurance need: it moves right as more of the business rests on one or two people.
It is a prompt for a conversation with your co-directors, not a verdict on any product.
Nothing you tick is stored or sent.
Tick what applies
The needle moves with each answer.
What a key person's absence costs
The cost is rarely one number.
It arrives in layers: sales that stop, work that stalls, a loan the bank wants repaid, shares that pass to someone's estate.
How big each layer is depends on your business, so this page shows no average.
Insurers ask the same question from the other side.
Before covering a key person, Legal & General says the business must be able to show it would lose profits in their absence (Legal & General ↗), and needs a financial relationship with the person (Legal & General ↗).
If this person left tomorrow
- Client relationships and new business built on their name
- Decisions nobody else is authorised to make
- Lender confidence, where borrowing was agreed on their record
- Their shares, which pass to their estate
Five ways to reduce key person risk
Insurance is the last step, not the first.
Most key person risk comes down by making knowledge, authority and ownership less concentrated.
Document
Write down what only they know
Clients, passwords, suppliers, processes and the reasons behind decisions. Keep it where the business, not the person, controls access.
Deputise
Name a deputy for every critical role
Give the deputy real work now, so they are ready rather than theoretical.
Succession
Agree who steps up, and how
A written plan or board minute that says who takes over each role, and on what terms.
Contracts
Make the paperwork match
Shareholder agreements, a cross option agreement between owners, and notice periods long enough to hand over.
Insurance
Fund what you cannot remove
Key person insurance pays the business if the person passes away or, with critical illness cover, is diagnosed with a covered illness. It replaces money, not the person.
Key man clauses in loans and term sheets
A key man clause is wording in a loan agreement or investment document that names the people a lender or investor is relying on.
What it does depends entirely on the wording, so read your own documents: some clauses require notice, some give the other side rights, some require cover to be in place.
Where a lender wants a loan protected, cover can be sized to the debt.
Legal & General lists the loan to be repaid if the key person passes away as one basis for the amount (Legal & General ↗), and Scottish Widows allows full business loan cover for up to 3 directors, owners or key persons (Scottish Widows ↗).
Insurance as the funding layer
Key person insurance is a policy the business takes out on someone it depends on.
HMRC's manual describes it as cover an employer takes out in its own favour against loss of profits from a key person's death, critical illness, sickness, accident or injury (HMRC ↗).
The business owns and pays for the policy, and any payout goes to the business (Legal & General ↗).
Premiums can be deductible only if the sole purpose is meeting a loss of trading income (HMRC ↗) and, for life cover, the policy is term insurance with no other benefits (HMRC ↗).
Whether a policy meets that is a question of fact, so check with your accountant.
Each insurer's published ceiling, not a recommendation; underwriting decides. Sources: Royal London (Royal London ↗), Scottish Widows (Scottish Widows ↗), Zurich (Zurich ↗) (a 2021 guide), Legal & General (Legal & General ↗).
Key person insurance versus other cover
Three other policies respond to the same events but pay different people for different reasons.
The table shows who each one pays and what it is for.
Rows summarise how the insurers describe their own products; check each at its link.
Do claims get paid?
Across the UK market, the great majority of protection claims are paid: the ABI's 2024 figures are shown here (ABI ↗).
Where a claim is declined, the ABI names two common reasons, listed here, so answer the application fully.
Check it for yourself
Every figure on this page is our summary of the documents listed here: HMRC's manual, the regulator, the ABI and the insurers' own guides.
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 at its link before you rely on it.
- HMRC Business Income Manual, BIM45525 ↗How HMRC treats key person premiums and payouts
- FCA Firm Checker ↗Check a broker or adviser is authorised before you buy
- MoneyHelper ↗Free, government-backed guidance on insurance
- Association of British Insurers ↗2024 protection claims figures
- Legal & General adviser guide ↗Sizing key person cover: earnings, profit and loan methods
- Royal London technical guidance ↗Key person and shareholder protection
- Scottish Widows key person calculator ↗Their published earnings multiples
- Zurich intermediary guide ↗Key person protection (November 2021 guide)
Key person risk, answered
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.