What is key person cover?
Most small businesses lean heavily on one or two people. It might be you as the founder, a co-director who brings in most of the work, or a senior colleague whose know-how would take years to replace. Key person cover is an insurance policy your business takes out on the life of that person. If they pass away or, depending on the cover chosen, are diagnosed with a serious illness, the policy pays out to the business - not to the individual or their family.
That money gives the business breathing space at exactly the moment it needs it most. Key aspects of this protection include:
- The business takes out the policy, pays the premiums and receives any payout;
- Cover can be arranged on a life-only basis, or with critical illness cover included;
- A small number of insurers also offer key person income protection, which pays a monthly benefit to the business for a limited period;
- Each key person has their own policy, so a business with two key people would usually have two plans.
This is where Cleerly can help. Call us on 02394 212912 or request a callback and we'll help you work out whether key person cover is right for your business.
Understanding key person cover
Who counts as a "key person"?
There's no fixed definition - it's whoever your business would genuinely struggle without. Often that's a director or owner, but it could just as easily be a head of sales with long-standing client relationships, a technical lead or a senior clinician. A useful test is to ask: if this person wasn't here tomorrow, what would it cost us, and for how long?
How long should the policy last?
The term should reflect how long the person is likely to stay key to the business. If you're planning to sell in five years, a shorter term may make sense; if the plan is to grow for the long haul, a longer term could be more suitable. It's usually better to get the term right from the start, because changes in health over time can make new cover harder or more expensive to arrange later.
Expert Commentary
"Most business owners insure their home, their car and their own life, but the business itself often depends on one or two people nobody has thought to protect. Key person cover shouldn’t be a number picked out of the air. We look at what that person really brings in and how long it would take to replace them, so the cover does its job if it’s ever needed."
Feeling inspired?
Not sure who's key, or how much cover your business needs? That's what we're here for.
Whether you're ready to get the ball rolling or you'd just like some friendly, no-obligation advice, give us a call on 02394 212912 or complete the form below and one of our protection specialists will be in touch.
Key person cover and tax
The tax treatment of key person cover depends on how the policy is set up and why. In some cases, HMRC may accept the premiums as an allowable business expense - generally where the cover is purely to protect the business against a loss of profits, the insured person doesn't have a significant shareholding, and the policy is a term policy. Where the premiums are allowable, any payout is normally treated as taxable income of the business. Where they aren't, the payout is usually tax-free.
Every business is different, so we always recommend checking the position with your accountant before the policy is set up. We're happy to work alongside them.
Key person cover FAQs
Key person cover protects the business - the payout goes to the company. Relevant life cover protects the individual's family - it's paid for by the company, but the payout goes into a trust for the person's loved ones. Many business owners have both, because they do different jobs.
Shareholder protection is designed to give the remaining owners the money to buy back a shareholder's shares, usually from their family, if they die or become seriously ill. Key person cover is about keeping the business trading. If you think you might need both, we can talk you through it.
Key person policies don't usually have any cash-in value or exit penalty, so the business can normally cancel the policy once that person is no longer key. You may then want to look at cover for whoever takes on their role.
Yes. Each person would normally have their own policy, tailored to their role and their value to the business.
Yes - some lenders and investors make it a condition of funding. We can help you work out who needs covering, for how much and for how long, so the policy does its job and the premium stays sensible.
They'll need to answer health and lifestyle questions, and for larger amounts the insurer may ask for medical evidence. It's important that all questions are answered fully and honestly, as failing to disclose something could affect a claim.
Important information: Key person cover is subject to the insurer's underwriting, terms, conditions and exclusions. Critical illness cover only pays out for conditions that meet the insurer's policy definitions. Policies have no cash-in value at any time, and cover will end if premiums are not paid. Tax treatment depends on individual circumstances and may change in the future. Cleerly does not provide tax or legal advice - please speak to your accountant or a tax specialist.
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