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Key person insurance

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Key person insurance

When a key person in a business dies or becomes critically ill, it can have a devastating impact on the financial stability of a business.

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When you own a business, there’s a lot to think about. So, when it comes to taking out a key person life insurance policy, you’d be forgiven for putting it off. In fact, according to Legal & General, a staggering 57% of businesses don’t have this type of insurance in place – a worrying statistic when you consider 40% of all businesses in the UK would cease trading in under a year if a key person or owner died or became critically ill.

What is Key Man Insurance?

Key person insurance is also referred to as key man insurance. It’s is a policy to protect a business against the financial loss it would suffer if someone vital to the business dies, or becomes critically ill.

In many cases, when the unthinkable happens, a business suffers a loss in sales and profits. Staff left behind are expected to take on increased workloads and learn new skills. The costs involved in replacing a key person can also impact a business’s bottom line. If they have a very specific skill-set, recruitment fees and the cost of training a new employee can be extremely high.

Unfortunately, for many businesses, the death or critical illness of a director, owner or key employee within an organisation can spell the end of a business for good.

The Benefits of Key Person Insurance

  • It helps you to afford the cost of recruiting and training a replacement
  • It provides financial aid that can be put toward outsourcing expenses while you look for a replacement
  • It enables your business to continue operating at the same level if the worst should happen to a key person.

How does Protection for a Key Person Work?

Key person protection is a life assurance policy or life assurance and critical illness policy that pays out a lump sum on the death or diagnosis of an insured key person. The policy itself is both owned and paid for by the employer. An employer is, therefore, the beneficiary of a claim.

How Does Taxation Work?

Key person insurance premiums can be offset against corporation tax. Lump sums are also paid to a company tax-free, however once received, are liable to tax in the same way any other money within a company is.

The tax treatment can vary depending upon the specific circumstances of a case. We always encourage people to consult their local tax office if they have any specific questions relating to the matter of tax. It is also a good idea to consult an accountant, as they will be aware of the circumstances under which a life insurance policy for a key person will be treated differently by the tax office.

Who is it for?

To put it simply, anyone who is of vital importance to your business. In most cases, this includes business owners and directors, but more and more, businesses are taking key man insurance cover for members of staff.

To help you identify exactly who you should take out cover for, we advise asking several questions specific to each member of staff within your business.

  1. Does this person have a specific skill that we would find hard to replace?
  2. How much of our business is reliant on the skill this person has?
  3. How much would it cost to replace this person if they were unable to continue working?
  4. How quickly would our business recover from the loss of this person?
  5. Would the loss of this person cause our business to lose existing or future customers?

Protection for Small Businesses

If you own a small business, you may consider a life insurance policy for your key worker as an unnecessary expense. After all, when you are a business in its infancy, it’s important to keep overheads to a minimum. Unfortunately, when a business is small, it’s also at its most vulnerable.

As a business owner, in a small or new business, you are likely to wear multiple hats. From managing sales and customer relationships all the way through to invoicing and the general day-to-day administration that comes with running a business. This makes it even more important. If you were unable to continue working, who would take your place?

If you own or run a small business and you’re worried about the cost of the cover, it could be worth taking a smaller policy in the beginning, and adding to it later. This is far better than no policy at all.

Protection for Large Businesses

Whilst small businesses and start-ups may be more dependent upon their owners and directors, as a large business, it’s your top employees you will need to consider for a key man life insurance policy. If your business has a large sales, marketing or finance department, you want to ensure you’re covered if one of your key people fall ill or pass away.

Great employees (or A players, as we like to call them), can be hard to find, and take many years to develop and train. Replacing someone with so much experience can take months, and cost a lot of money – no matter how big your business. A key person insurance policy will help to buy you time if the worst happens.

How much does it cost?

The cost of insuring your key person will vary depending upon the policy you choose.

The amount of cover needed is subject to a key person’s contributions towards the profits of a business. To establish what this is, the following formula is used:

Total salary expenditure multiplied by the average gross profit for a period of two years. This figure is then multiplied by the number of years the recovery of the business is expected to take.

How do I know which policy I need?

If you own a small business, you may consider a life insurance policy for your key worker as an unnecessary expense. After all, when you are a business in its infancy, it’s important to keep overheads to a minimum. Unfortunately, when a business is small, it’s also at its most vulnerable.

The easiest way to get advice regarding insurance for your key person, and to find out exactly what cover you need is to talk with an expert. In fact, 89% of businesses took out a policy after taking or seeking advice to protect their business.

To talk with one of our experts today, call 03333 440 129. Alternatively, please fill out the form below and one of our experts will contact you directly to discuss your requirements.


As the director of a start-up marketing agency, I’m too busy to spend a lot of time researching all of the insurance policies we need, let alone finding time to search for the best cover. When I spoke with Gareth, he was incredibly helpful. He explained to me exactly what I need and then found the best policies for the business, its directors and employees. Now I know that the business and its assets are protected, whatever happens. I would highly recommend Gareth, Darren and the rest of his team.

Tom Mitchener “”