Key man insurance, for the people you cannot replace

What is key man insurance?

Key man insurance is a life insurance policy, often with critical illness cover added, that a business takes out on the life of someone it cannot afford to lose. The business applies for it, the business pays the premium, and the business receives the money. It is taken out by a business for the benefit of the business, which is what separates it from ordinary personal cover.

You will see the same product called keyman insurance, key person insurance, key person cover and key person protection. They are the same thing. "Key man" is simply the older name, and it has stuck because it is what business owners still search for. Whichever label the insurer uses, the policy is owned by the business and the payout is paid directly to the business as a lump sum.

Who is considered a key person for insurance purposes?

A key person could be anyone whose experience or leadership drives business revenue, not just whoever has "director" on their business card. The test we use is blunt: if this person did not come in on Monday, and never came in again, what happens to the numbers?

In practice the key people in a small company are the founder or managing director, the one salesperson who holds most of the relationships, the technical specialist nobody else can cover, and occasionally the operations manager who quietly knows how everything works. A key employee with no shareholding can be far more critical than a shareholder who has stepped back. Most businesses we speak to identify two or three key people, and are surprised by at least one of them.

How much does key man insurance cost?

The insurance cost depends on the age and health of the person being insured, whether they smoke, the amount of cover, the term, and whether you want life only or life and critical illness. Life and critical illness together typically costs several times what life alone costs, because claims are far more common.

A healthy person in their thirties can often be covered for a few hundred thousand pounds for the price of a monthly phone contract; the same cover on a smoker in their late fifties is a different conversation entirely. Any figure we quote is illustrative only until an insurer has underwritten the application. We compare the whole market, so the premium you are shown is the best available for that person on that day, not one insurer's opinion.

Is key man insurance tax deductible?

Sometimes. Premiums paid for key person cover may be treated as an allowable business expense, giving tax deductions against corporation tax, where three broad conditions are met: the person insured is an employee rather than a substantial shareholder, the cover is life only with no investment or capital element, and the term is short and relates only to the period of risk.

The trade-off is that where premiums have been allowed as a deduction, the payout is usually treated as a trading receipt and taxed, which increases the corporation tax liability in the year of claim. Where relief is not given, the proceeds are generally not taxed. Neither outcome is automatically better; it depends on your numbers. The tax treatment and wider tax considerations depend on your circumstances and should be confirmed with your accountant, and HMRC can take a different view case by case.

The benefits of key person cover, and what happens without it

The benefits of key person insurance are mostly about time. A payout buys you the months needed to stabilise, recruit properly instead of panic-hiring, and reassure customers, staff and lenders. Business continuity stops being a hope and becomes a funded plan.

Without it, the loss of a key individual lands entirely on cash flow. We have watched a profitable firm lose its only estimator to a stroke, be unable to work through the pipeline, and shrink by a third inside a year, purely because there was no money to bridge the gap. The loss of a key person is not usually what closes a business. Running out of cash while dealing with it is.