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What is Key Person Insurance?Complete UK Guide
Everything you need to know about key person insurance in the UK
Learn about keyman insurance, costs, tax treatment, and how to protect your business from losing essential people.
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Key Person Insurance Meaning & Definition
Key person insurance (also known as keyman insurance or key man insurance) is a type of life insurance policy that a business takes out on the life of an essential employee, director, or owner. The key man insurance meaning is simple: it's business protection against losing someone vital.
The key person insurance definition: A policy owned by a business, covering a key employee, where the company pays premiums and receives the payout if that person dies or becomes critically ill. Unlike personal life insurance where the family receives the payout, key person insurance pays the business directly.
In simple terms: If you have someone in your business whose death or serious illness would cause significant financial problems, key person insurance provides a safety net for your company.
How Does Key Person Insurance Work?
1
Business Takes Out Policy
Your business applies for key person insurance on the life of your key employee
2
Business Pays Premiums
Your company pays the monthly or annual premiums as a business expense
3
Key Person Dies/Falls Ill
If the insured key person dies or is diagnosed with a critical illness (if covered)
4
Business Receives Payout
The insurer pays a lump sum directly to your business to use as needed
What Can the Payout Be Used For?
- ✓Covering lost profits during transition
- ✓Recruiting and training a replacement
- ✓Repaying business loans or debts
- ✓Reassuring investors and lenders
- ✓Maintaining client relationships
- ✓General business continuity
Who Counts as a Key Person?
A key person is anyone whose loss would significantly impact your business financially. Ask yourself: "If this person died tomorrow, what would happen to our business?"
Founders & Directors
The vision, leadership, and relationships that founders bring are often irreplaceable. Their loss could destabilize the entire business.
Top Salespeople
Key account managers and sales directors who hold crucial client relationships. Losing them could mean losing major revenue streams.
Technical Specialists
Employees with unique skills, certifications, or knowledge that would be expensive and time-consuming to replace.
Creative Leads
Lead designers, product developers, or innovators whose creative vision drives the business forward.
Operations Managers
People who keep the business running day-to-day. Their institutional knowledge is often invaluable.
Anyone Essential
Any employee whose absence would cause significant financial loss, regardless of their job title.
Types of Key Person Insurance Cover
Key Person Life Insurance
Pays out a lump sum if the key person dies. The most common form of key person insurance.
- Death benefit paid to company
- Lower premiums than combined cover
Learn more →
Key Person Critical Illness
Pays out if the key person is diagnosed with a serious illness like cancer, heart attack, or stroke.
- Covers serious illnesses
- Often combined with life cover
Learn more →
Most businesses choose combined life and critical illness key person insurance for comprehensive protection.
Key Person Insurance Pros and Cons
Like any business decision, key person insurance has advantages and disadvantages to consider.
Pros of Key Person Insurance
- Financial protection
Provides funds to survive the loss of a crucial employee
- Tax efficiency
Premiums may be tax deductible as a business expense
- Investor confidence
Shows stakeholders the business is protected against key risks
- Affordable premiums
Relatively low cost compared to potential business losses
- Flexible use of payout
Use funds for recruitment, lost profits, or any business need
Cons of Key Person Insurance
- Ongoing cost
Premiums are an ongoing business expense
- Health requirements
Key person must pass medical underwriting
- Payout may be taxable
If premiums were deductible, payout is typically taxable
- Employee may leave
If key person leaves, policy may need to be cancelled
- Complexity
Calculating cover and understanding tax rules requires advice
How Much Does Key Person Insurance Cost?
Key person insurance is more affordable than you might think. Costs depend on age, health, cover amount, and policy term.
£20-40
Per Month
£100,000 life cover for a healthy 35-year-old non-smoker
£40-80
Per Month
£250,000 life + critical illness for a healthy 40-year-old
£80-150
Per Month
£500,000 comprehensive cover for a 45-year-old
Is Key Person Insurance Tax Deductible?
The tax treatment of key person insurance depends on how the policy is structured.
May Be Tax Deductible If:
- ✓Policy is solely for business benefit
- ✓Covers loss of profits only (not loans)
- ✓Key person is an employee
- ✓Policy term matches service expectation
Not Tax Deductible If:
- ✗Policy used for loan protection
- ✗Payout goes to the key person's family
- ✗Key person is a shareholder (not employee)
- ✗Policy provides personal benefit
Important: Tax rules are complex. Always consult a qualified accountant for advice specific to your situation.Learn more about tax treatment →
Key Person Insurance FAQs
What is key person insurance?
Key person insurance is a life insurance policy taken out by a business on the life of an essential employee, director, or owner. If that key person dies or becomes critically ill, the policy pays a lump sum to the business to help cover financial losses, recruit a replacement, or repay debts.
How does key person insurance work?
The business takes out a policy on the key person's life, pays the premiums, and is the beneficiary. If the key person dies or suffers a critical illness (if included), the insurer pays a lump sum directly to the business. The business can use this for any purpose.
Who counts as a key person?
A key person is anyone whose loss would significantly impact the business. This typically includes founders, directors, major shareholders, top salespeople, technical specialists, or anyone with unique skills, knowledge, or client relationships that would be difficult to replace.
Is keyman insurance the same as key person insurance?
Yes, keyman insurance, key man insurance, and key person insurance are all the same thing. "Key person" is now the preferred term as it's gender-neutral, but all terms refer to identical coverage.
What is the key man insurance meaning?
The key man insurance meaning is simple: it's a business protection policy that pays your company if an essential employee dies or becomes seriously ill. The key person insurance definition covers life insurance owned by a business on a key individual.
What happens to key man insurance if the employee leaves?
If the key employee leaves your company, you have several options for your key person insurance: cancel the policy and stop paying premiums, transfer coverage to a new key person (subject to underwriting), or assign the policy to the departing employee as part of their exit package (rare). Most businesses simply cancel when the employee is no longer "key" to the business.
Protect Your Business Today
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