Most businesses insure their premises, their equipment, and their fleet. Almost none insure the person the whole thing depends on. That's not oversight — it's the most expensive gap in UK business protection.
There's a version of this conversation I have fairly often. A business owner, usually the founder or a director, comes in to talk about something else — shareholder protection, maybe, or a director's pension. And somewhere in the conversation I ask: "If you lost your best salesperson tomorrow, what would that cost you?"
The pause that follows is always the same. You can almost see them doing the mental maths for the first time.
Claire ran a 14-person PR agency. She'd built it carefully over nine years — three anchor clients, a team that knew what they were doing, and a lead account director, James, who had been with her since year two. James wasn't just good at his job. He was the person clients called first. He remembered their CMO's name, their quarterly pressures, their preferences. He ran the new business pitch process personally.
Three months after James was diagnosed with cancer and went on long-term sick leave, two of Claire's three anchor clients had quietly moved their retainers elsewhere. Not in a dramatic way — just the usual "we're reviewing our agencies" conversation that she hadn't seen coming. The business survived. Just. She hired a replacement at a significant premium, lost six months of growth, and spent a year rebuilding what James had quietly held together.
Claire had no key person cover. She hadn't thought James was a business risk. She thought he was just very good at his job.
Key person insurance exists for exactly this moment. Not as a comfort — as a financial bridge between the day something goes wrong and the day your business has found its footing again.
Plain English version: the company takes out a life (and usually critical illness) policy on a key individual. The company pays the premiums. If that person dies or suffers a serious illness, the payout goes directly to the business — not to the family.
This is not a death-in-service benefit for the employee. The beneficiary is the business. The purpose is to protect the company from the financial consequences of losing someone critical — whether through death, critical illness, or (with income protection) long-term incapacity.
The company. It is a business asset, not a personal one. The employee has no entitlement to the payout — it belongs entirely to the firm.
The company pays from its trading funds. Depending on HMRC treatment, premiums may be corporation tax deductible — see the tax section below.
Death, or a defined critical illness (typically one of 30–50 covered conditions depending on the insurer). The policy can also be written on a Life or Earlier Critical Illness basis — the first event to occur triggers the payout.
Whatever it needs to do to survive: hire a replacement, cover lost revenue, reassure lenders, or hold the business together while the team adapts. There are no restrictions on use.
Adjust the inputs below to estimate your exposure and a suggested starting point for cover.
All figures are illustrative estimates only and do not constitute a quotation or financial advice. Actual premiums depend on the insured person's age, health, occupation, and sum assured. The 1.5× multiplier is a working guide, not a formula. Speak to Andy for a personalised review.
Select the roles that resonate with your business. Each expands to explain the specific risk — and why it qualifies for cover.
The founder often carries relationships, institutional knowledge, and decision-making authority that simply can't be replicated from a job ad. Customers may have chosen the business because of this person. Lenders may have extended credit on the basis of their presence.
Beyond revenue, there's often a confidence effect: staff, clients, and suppliers all respond to a founder's absence differently than they would to any other employee leaving.
The 20% threshold matters because it's the point at which a single person's absence creates a structural hole in the business, not just a capacity gap. A business generating £1.5m with one salesperson responsible for £350k has a concentration risk it probably hasn't quantified.
The additional complication: a top salesperson's relationships often follow them. When they're ill, clients wait. When clients get nervous, they don't always wait.
This is common in engineering, software, construction, and professional services. There's one person who understands the bespoke infrastructure, the legacy code, the regulatory compliance framework, or the client delivery model. Everyone else is excellent at what they do — but they depend on this person for the pieces only they know.
The risk here is operational: the business can't deliver, not just that it might lose clients. Cover funds emergency contractors, knowledge documentation, and the significant time required to find a qualified replacement.
In professional services — law, accountancy, PR, consultancy — client loyalty is often personal. The client trusts a specific individual. When that individual goes, the next call from the client is frequently to their new employer, not to the firm they left.
The cover amount in this case often relates to the lifetime value of the clients at risk. A 12-month revenue figure is a sensible starting point, but firms with long-term retainer relationships may want to go further.
For businesses that carry bank debt or have institutional investors, a key director is often central to the lending covenant. Some facility agreements explicitly require life cover on named directors as a condition of the loan. Even where it isn't contractually required, a lender's confidence in the management team is a material factor in whether facilities remain available.
Cover here serves a dual purpose: it maintains the business's borrowing position and provides cash to service or repay facilities during the adjustment period.
There are no restrictions on how a key person payout is spent. In practice, businesses typically apply it in one of four ways.
Senior hires are expensive. Recruitment fees for specialist or director-level positions typically run to 15–25% of salary, and that's before induction, training, and the 6–12 month period before someone is fully productive. The payout removes the budget pressure that forces a hasty hire.
Revenue doesn't pause while you recruit. The payout can directly replace the trading profit that would otherwise have been earned by the key person's contribution — buying the business time to stabilise without a cash crisis forcing hard decisions.
Banks notice management changes. A lender who might otherwise have reviewed or reduced a facility can be reassured — and the cover proceeds can be used to demonstrate that the business has the financial resilience to continue servicing its debt obligations.
Sometimes the honest answer is that the business needs to change shape. The payout funds that process properly — giving the board time to make considered decisions rather than reactive ones, and protecting the interests of remaining employees and shareholders in the process.
Most key person enquiries start with "life cover." In practice, critical illness cover is at least as important — and statistically far more likely to pay out during a typical working career.
Key statistic: A 45-year-old male non-smoker has approximately a 1-in-3 chance of suffering a critical illness before age 65, compared to roughly 1-in-11 chance of dying before 65. Critical illness is far more likely to disrupt your business — yet it's routinely left off key person policies.
| Life only | Critical illness only | Life + Critical Illness | |
|---|---|---|---|
| Triggered by death | ✓ | ✗ | ✓ |
| Triggered by serious illness (cancer, heart attack, stroke etc.) | ✗ | ✓ | ✓ |
| Pays out while key person is still alive | ✗ | ✓ | ✓ |
| Statistically most likely to pay out during working years | ✗ | ✓ | ✓ |
| Covers disruption from long-term absence, not just loss | ✗ | ✓ | ✓ |
| Typically recommended for key person cover? | Minimum floor | Better than nothing | Recommended |
When a policy covers "Life or Earlier Critical Illness," it pays out on whichever event occurs first. The sum assured is paid once. For most businesses, this is the appropriate structure — full financial protection from the most likely scenarios, not just the ultimate one.
Key person cover has a specific tax treatment that depends on the purpose of the policy. Getting this right matters — and it affects both the premiums and the payout. Always confirm your specific position with your accountant.
The rule of thumb: If the policy is designed to replace a trading loss (lost profit, lost revenue), premiums are likely to be corporation tax deductible and the payout will be taxable income. If the policy is designed to repay a capital liability (a bank loan, for example), the premiums are not deductible and the payout is not taxable. The two treatments mirror each other — you can't have deductible premiums and a tax-free payout.
HMRC ESM16210 indicates that short-term policies taken out to protect trading profits are likely deductible as a business expense. Not a guarantee — confirm with your accountant.
Where the purpose is capital protection (e.g. covering a loan to the business), premiums are not a deductible trading expense and must be paid from after-tax funds.
If premiums were deductible, the payout is treated as a trading receipt and subject to corporation tax. The net benefit is still meaningful — but needs to be factored into the sum assured.
Where premiums were not deductible, the payout is a capital receipt and not subject to corporation tax. The full sum assured is available to the business.
Practical note: For most trading profit protection policies, the net position after corporation tax is still highly favourable. If your company pays 25% corporation tax, a £1m payout produces a ~£750k net benefit — and the premiums cost you only 75p in the pound. The key is to set the right sum assured, knowing the gross figure will be reduced on receipt. Always confirm tax treatment with your accountant — HMRC rules can change and individual circumstances vary.
Key person cover is the right idea. These are the ways it typically goes wrong — or gets confused with something else entirely.
A common starting point is "let's cover their salary." But a key person earning £80k who manages £400k in client revenue doesn't represent an £80k risk to the business — they represent a £400k one. Salary is a proxy for cost; the real figure is the contribution they make to the top line and the cost of losing it.
A pure life policy on a 40-year-old has a relatively low actuarial risk — and a relatively low probability of paying out before retirement. Critical illness cover adds the protection that's most likely to be needed during the key person's active working years. Leaving it off to save on premium is a false economy.
A policy set five years ago at £250k sum assured may have made sense then. If the business has grown, if the key person now manages a larger team or more revenue, or if the policy is close to its term end, the cover may be materially inadequate. Key person insurance should be reviewed at least every two to three years, and whenever the business changes significantly.
These are different products with different purposes. Shareholder protection is owned by the shareholders individually (or via a discretionary trust) and funds the purchase of shares on death. Key person cover is owned by the company and compensates it for a trading loss. They can be taken out on the same individual — but they're not interchangeable and shouldn't be treated as substitutes for each other.
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