Every business has individuals who play a critical role in its success—whether through deep industry knowledge, long-standing client relationships, or unique skill sets that are hard to replace. The sudden loss or extended absence of these individuals can be devastating from both financial and operational standpoints. Key Person Insurance (sometimes referred to as Key Man Insurance) is designed to mitigate these risks by providing a financial safety net if a vital employee, director, or business owner becomes seriously ill, disabled, or dies. Below, we explore what Key Person Insurance is, why it matters, how it works, and what business owners in the UK should consider before taking out a policy.
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Key Person Insurance is a life insurance or critical illness policy that a company takes out on an essential employee, often a founder, executive, or highly specialized team member. The policy is owned and paid for by the company itself, and if the insured individual passes away or suffers a critical illness covered by the policy, the insurer pays out a sum to the business.
The main aim is to protect the business financially so it can cope with the repercussions of losing a key staff member. This might include:
A sudden, unexpected absence of a vital team member can cause disruptions that threaten the financial security of the entire enterprise. Key Person Insurance provides a financial buffer during this vulnerable period, giving the business time and resources to adapt. Specific reasons include:
1. Revenue Protection
If the key person is responsible for a significant share of the firm’s revenue, their absence can lead to reduced sales or halted projects. Insurance proceeds can help cover lost revenues while the business regroups.
2. Operational Continuity
A payout can fund the hiring or training of another individual with comparable expertise. It also provides necessary capital to maintain day-to-day operations.
3. Confidence for Stakeholders
Suppliers, clients, and investors are more likely to remain supportive if they know the company has a contingency plan. Having Key Person Insurance in place offers reassurance and can protect the business’s creditworthiness.
4. Protection of Personal Guarantees
In some cases, key individuals might have signed personal guarantees on business loans. In the event of their death, lenders could call in these loans. Key Person Insurance helps ensure the company has enough liquidity to meet its obligations, minimising the impact on personal estates or co-owners.
In principle, any employee, director, or partner who significantly contributes to the profitability, innovation, or sustainability of a business can qualify as a “key person.” Common examples include:
The key person is typically someone whose departure or extended absence would cause a noticeable drop in revenue or substantial operational difficulty. In smaller businesses, it could be a single individual with multiple roles. In larger organisations, it might be several executives or team leads.
1. Policy Ownership: The business, rather than the individual, owns the policy. The business pays the premiums, and if a valid claim arises, the policy benefit is paid out to the business.
2. Life Cover vs. Critical Illness Cover:
3. Policy Term: Usually matches the period during which the key person’s role is crucial to the business. Some terms may be linked to planned retirement dates or the time until a loan is paid off.
4. Sum Assured: This is the payout amount. It should be carefully calculated to match the financial impact of losing the key individual—often based on profits attributable to that person, revenue generated, or costs that would arise in their absence.
There is no one-size-fits-all policy. Companies can tailor coverage to their unique needs:
5.1. Level-Term Insurance
This provides a fixed payout if the key person dies (or becomes critically ill, if added) during the specified term. The sum assured remains constant throughout.
5.2. Decreasing-Term Insurance
The sum assured decreases over time, typically used when covering a loan or liability that reduces with repayments (e.g., a business loan).
5.3. Whole-of-Life Insurance
Less common for Key Person cover because it provides lifelong protection and can be more expensive. However, it may be relevant for high-value business owners who are also planning for inheritance tax or other long-term considerations.
5.4. Critical Illness Riders
A policy can include or be complemented by a critical illness rider. If the individual suffers a covered serious illness, the insurer pays out, which can be vital for funding the business while the key person undergoes recovery.
In the UK, the tax implications of Key Person Insurance can vary depending on the purpose of the policy and how premiums and payouts are treated by HMRC. The following are general guidelines:
1. Premiums
2. Payouts
Determining the right sum assured is crucial. Consider the following factors:
1. Profit Contribution
Estimate the percentage of the company’s profits that can be directly attributed to the key person’s efforts or relationships.
2. Recruitment Costs
Hiring or training a replacement can be expensive, especially if the role requires specialised skills or advanced industry knowledge.
3. Debt and Liabilities
If the key person has provided personal guarantees or the business carries substantial debt that relies on their continued involvement, factor this into the coverage.
4. Time to Recover
Think about how long it would take the business to bounce back—whether from recruiting and training a new employee or redistributing responsibilities among the remaining team.
1. Identify Key Roles
Start by listing individuals who are integral to revenue, operations, or strategic direction. Determine the financial value each brings to the company.
2. Consult an Adviser
Work with an independent financial adviser or insurance broker familiar with Key Person Insurance. They can help evaluate multiple policy types and structures, ensuring they align with your business goals and tax considerations.
3. Underwriting Process
Insurers will assess the individual’s health, occupation, and sometimes lifestyle factors (e.g., smoking status). The insured key person may need to complete medical questionnaires or undergo a medical exam.
4. Policy Selection and Documentation
Choose between level-term, decreasing-term, or whole-of-life coverage, as appropriate. Ensure the policy’s ownership and beneficiary structure are correct: the business should be the policy owner and receive any proceeds.
5. Agree Premiums and Final Terms
Once the underwriter provides a final quote, review it for accuracy. Make sure you fully understand any exclusions or critical illness definitions if relevant.
1. “It’s Only for Large Corporations.”
Key Person Insurance can be just as crucial—if not more so—for small or medium-sized enterprises where one or two individuals drive the bulk of the revenue or strategic decisions.
2. “It’s Too Expensive.”
While premiums vary based on age, health, and sum assured, smaller policies can be surprisingly affordable. The cost of not having coverage—loss of clients, inability to repay loans, or forced closure—can be much higher.
3. “We Already Have Life Insurance.”
Standard life insurance policies typically benefit an individual’s family, not the business. Key Person Insurance is specifically structured so that the business entity is the beneficiary.
4. “We’ll Simply Manage Without Them.”
Transitioning responsibilities takes time and resources, especially if the individual holds unique knowledge or client relationships. The financial payout from a Key Person policy can provide vital breathing room.
As your business evolves, the role and impact of certain individuals may change. You might bring on more specialists, expand into different markets, or restructure your executive team. It’s crucial to:
Key Person Insurance is an essential risk management tool for businesses of all sizes in the UK. By protecting against the financial losses that can arise from the death, serious illness, or disability of an indispensable team member, it provides peace of mind and ensures greater business continuity. While it involves careful planning—from identifying who truly qualifies as a key person to selecting the right policy type and sum assured—the investment can prove invaluable in a worst-case scenario.
When structured correctly, Key Person Insurance instils confidence in stakeholders, maintains operational stability, and safeguards the financial future of the company. If you’re unsure how to proceed, start by listing the roles critical to your business’s success, then consult a qualified financial adviser or broker. This proactive approach helps ensure your firm remains resilient—even in the face of unexpected challenges—and can continue thriving long into the future.
Minerva Financial Planning is a trading style of OSL Financial Consultancy Limited which is authorised and regulated by the Financial Conduct Authority (Our Financial Services Reference number is 747664).
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