Key person income protection for the people your business cannot replace
If one director, founder or specialist employee is off sick for months rather than weeks, what happens to the money? Key person income protection pays your business a monthly income while they cannot work.
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If your business depends heavily on one director, founder or specialist employee, what happens financially if that person is off sick for months rather than weeks? Key person income protection replaces a proportion of the business income lost while a key employee is unable to work due to illness or injury, giving the company breathing room instead of an immediate cash flow crisis.
What is key person income protection, and what does it cover?
Key person income protection is a policy taken out and paid for by the business, paying a monthly benefit to the company if a named key person is unable to work due to illness or injury for longer than a set deferred period. Rather than paying a lump sum on death or critical illness, it replaces ongoing business income — covering lost revenue, the cost of a temporary replacement employee, loan repayments, or simply keeping the business afloat while that key employee recovers. The policy is owned by the business, the premium is paid by the business, and the benefit is paid to the business rather than to the individual.
It sits in the same family as executive income protection, but the two are not the same thing. Executive income protection replaces a director's own post-tax income, including salary and dividends where the insurer allows. Key person income protection protects the company's gross profit against the loss of a key individual's contribution. A company can hold both, on the same person, for different purposes.
Key features of a key person income protection policy
The key features of most key person income protection policies are a monthly benefit paid to the business after the deferred period, cover that continues for as long as the key person remains unable to work up to the policy's claim period, and a premium calculated against that individual's value to the business rather than a fixed company-wide rate. Many policies also include rehabilitation and early intervention support, aimed at getting the key person back to work sooner, which is worth more than most businesses expect.
What happens when the key person returns to work?
When the key person returns to work, the monthly benefit stops, since the policy is designed to bridge the gap rather than provide an ongoing income indefinitely. Many insurers also support a phased return — reduced hours or adjusted duties — with the benefit tapering off gradually rather than stopping abruptly the day someone is technically back at their desk.
Income protection vs life cover for a key person: which risk are you covering?
The simplest way to think about income protection vs a lump-sum policy is timing and severity. A lump-sum policy is triggered by a single, serious event. Income protection is triggered by any illness or injury that keeps the person off work beyond the deferred period, including conditions that are temporary but still seriously disruptive, such as a long recovery from surgery or a mental health absence. For most businesses it is the more likely claim of the two, and many hold both because they cover different points on the same risk. Critical illness cover can also be bolted on, so a lump sum lands alongside the monthly benefit.
Lump-sum cover on a key person
- Pays once, on death or a specified critical illness
- A single, severe, less likely event
- Money for recruitment, debt or lost capital value
- See our key person insurance page
Key person income protection
- Pays a monthly income while they cannot work
- Any illness or injury past the deferred period
- Money for gross profit, overheads and temporary cover
- Stops when they return to work
A note on "key man" terminology
Key man insurance and key man cover are simply older names for the lump-sum product. They work identically; the terminology has moved on to reflect that a key person in any business can be male or female. If you see key man insurance referenced by an older provider or adviser, it is the same policy.
The financial impact of losing a key employee to long-term illness
Losing a key employee to long-term illness has a real, calculable financial impact: lost sales or delayed projects if the person holds the client relationships, the cost of finding a suitable replacement and hiring a temporary replacement employee, and the ongoing overhead of continuing to pay their salary or sick pay while they are not generating income for the business.
For a small company built around one or two people, that can be severe enough to threaten cash flow within a matter of months, not years. Cover in place can also reassure lenders and investors that the business has planned for the loss of a critical individual, and is occasionally a condition of a business loan.
Who counts as a key person, and when should you take out key person cover?
A key person is anyone whose absence would genuinely hurt the business financially, not just operationally. The right time to take out key person cover is as soon as you can identify that person, rather than waiting until the business has grown large enough that losing them would be catastrophic. Premiums rise with age and health history, so the cover is rarely cheaper later than it is now.
The rainmaker
The fee earner or founder who still brings in most of the new business and holds the client list personally.
The only qualified one
The engineer, clinician or technician who is the only person who can sign off the work, so the work stops without them.
The business owner
For many small companies the key person is the owner themselves, which is worth remembering when deciding who to cover first.
Not sure who your key people actually are? That is the first thing we work out.
Book a 30-min business protection callHow much cover, what deferred period, and what will the premium be?
The level of cover and the premium depend on how much of the business's income or gross profit is genuinely tied to that individual, their age and health, the nature of their occupation, and how long a deferred period the business can realistically absorb before the monthly benefit needs to start. A longer deferred period means a lower premium, but only if the business can actually fund the gap from reserves or sick pay.
A specialist adviser's role is to work through that with you properly against your accounts. An adviser who quotes a round number without understanding how your business makes money is not doing the job. We compare providers including Royal London, Legal & General and the other major insurers, each of which offers key person income protection with different deferred periods, claim periods and underwriting approaches, rather than defaulting to one household name.
Is key person income protection a business expense? The tax treatment
Premiums are often an allowable business expense and may attract corporation tax relief, on the basis that the policy exists wholly and exclusively for the purposes of the trade. Where the premium is treated as deductible, the benefit is usually subject to tax as a trading receipt when it is paid to the company. Where it is not deductible, the benefit may be received free of tax.
HMRC looks at the purpose of the policy and the relationship between the insured and the business, so the tax implications genuinely differ from company to company. We will tell you how HMRC is likely to view your arrangement and recommend you confirm the treatment with your accountant before the policy starts. This is general information, not tax advice.
Where key person income protection fits in your business protection plan
Key person income protection is one part of a wider business protection plan. Each of these addresses a different gap in what happens if a key individual dies, becomes critically ill, or is simply no longer able to work for an extended period. Getting them in the right order matters more than buying all of them at once.
Key person insurance
A lump sum to the business if a key person dies or is diagnosed with a specified critical illness during the term.
Shareholder protection
Funds the purchase of a departing owner's shares, so the remaining owners keep control and the family gets fair value.
Business loan protection
Clears a director's loan, overdraft or commercial borrowing if the person who guaranteed it is no longer there.
Relevant life insurance
Company-paid life cover for an individual director or employee, usually more tax-efficient than a personal policy.
Executive income protection
Replaces a director's own income, including dividends where the insurer allows, rather than the company's profit.
Group health insurance
Gets people diagnosed and treated faster, which is the cheapest way to shorten an absence in the first place.
Key person income protection FAQs
What is key person income protection?
A policy that pays a monthly benefit to the business if a named key employee is unable to work due to illness or injury for longer than the deferred period.
What is the difference between key person insurance and key person income protection?
Key person insurance pays a lump sum to the business on death or critical illness. Key person income protection pays a monthly income while the person is off work through illness or injury.
Can a company hold both key person insurance and executive income protection on the same person?
Yes. They cover different risks — one protects the company against the loss of the individual, the other replaces that individual's own income.
Is key person income protection a business expense?
Premiums are often an allowable business expense, though the tax treatment depends on the structure and purpose of the policy. Confirm it with your accountant.
Do we need key person cover or shareholder protection?
Shareholder protection funds the purchase of a departing owner's shares. Key person cover replaces the income or profit that person generated. Most businesses with more than one owner need both.
How long does key person income protection pay out for?
Until the key person returns to work, the claim period ends, or the policy term ends — whichever comes first. Short-term options pay for one, two or five years; full-term cover runs to the chosen end age.
How much cover does a business need?
Usually based on the gross profit or revenue genuinely attributable to that individual. We calculate a defensible figure from your accounts rather than guessing.
Company-paid or personal income protection?
They answer different questions. A company-paid key person policy protects the business; a personal or executive policy protects the individual's household income. Plenty of directors need both.
Talk to us about protecting your business income
Whether you already have cover in place and want to add key person income protection, or you are starting from scratch, we will identify who your key people actually are, compare cover across the market, and build a business protection plan that fits how your company is genuinely exposed.
Book a 30-min business protection callCall 01933 829 444This page is general information and not a personal recommendation, and it is not tax advice. Tax treatment depends on your individual circumstances and may change.