Key Person Insurance: Safeguarding Your Business Against the Unexpected

Every successful business relies on key individuals—those whose knowledge, relationships, and leadership are central to performance and profitability. But what happens if one of those people is suddenly unable to work due to illness, injury, or death?

Key Person Insurance is designed to protect businesses from exactly that scenario. In this comprehensive guide, we explain what it is, how it works, why it’s essential for SMEs, and how to set it up correctly. Whether you're a business owner, shareholder, or director, understanding this form of protection could be the difference between survival and collapse.

What Is Key Person Insurance?

Key Person Insurance (KPI) is a life and/or critical illness insurance policy that a business takes out on an individual who is crucial to the company’s success. If that person dies or becomes seriously ill, the policy pays out a lump sum to the company.

The goal? To provide immediate cash to help the business:

• Replace lost profit

• Recruit and train a replacement

• Protect against loss of confidence from customers, suppliers, or investors

• Repay debts or maintain credit agreements

• Support continuity during disruption

This insurance doesn’t pay the individual or their family directly—it pays the company, helping to safeguard the business's future.

Why Key Person Insurance Matters for SMEs

For small and medium-sized businesses, the loss of a key individual—whether a founder, technical expert, or rainmaking director—can have a disproportionate impact.

Imagine losing:

• The only person with deep technical knowledge

• The founder whose reputation drives client loyalty

• The sole signatory on major contracts

• A lead salesperson responsible for 70% of income

Without protection, the business might:

• Lose revenue and customers

• Struggle to service debt or payroll

• Miss critical project deadlines

• Collapse entirely

Key Person Insurance provides a financial buffer to manage through crisis, maintain operations, and protect the value you’ve worked hard to build.

Who Counts as a “Key Person”?

A key person is anyone whose absence would have a material impact on the business’s ability to trade or remain profitable. This could include:

• Company founders

• Managing directors

• Lead developers or technical specialists

• Sales directors or top-performing relationship managers

• Finance directors or CFOs

• Medical professionals in private practices or clinics

• Practice owners in legal, accountancy, or consultancy firms

It’s not about title—it’s about value to the business. For SMEs, this is often one or two individuals, not large teams.

What Does Key Person Insurance Cover?

Key Person Insurance typically includes:

✅ Life Cover

Pays a lump sum if the key person dies during the policy term. This is the most common and basic element of cover.

✅ Critical Illness Cover (Optional)

Pays out if the insured person is diagnosed with a specified serious illness (e.g., cancer, heart attack, stroke). This adds protection for long-term incapacity that disrupts business operations.

✅ Total Permanent Disability (Optional Add-On)

Some policies allow cover for long-term incapacity even if it doesn’t meet the narrow definitions of critical illness.

How Much Cover Does a Business Need?

The amount of cover depends on:

• Loss of profits directly attributable to the key person

• Cost to replace them (recruitment, training, onboarding)

• Business debts for which they are a guarantor

• The time needed for recovery or succession

Common methods to estimate cover:

1. Multiple of salary: 5–10x gross salary if that's a good proxy for their value.

2. Multiple of profit contribution: e.g. 2x gross profit attributable to that individual.

3. Loan protection: Cover equal to outstanding business loans tied to the key person.

Your adviser will help you model these options.

Tax Treatment of Key Person Insurance

The tax treatment depends on who the policy is for, why it’s taken out, and who receives the benefit. HMRC provides guidance, but it’s essential to seek advice.

Premiums:

• Usually not tax-deductible unless the policy is purely for loss of profits, the business is the beneficiary, and it’s for a fixed-term employee.

• If the key person is also a shareholder, deductibility is unlikely.

Payouts:

• Generally tax-free if premiums were not deducted against corporation tax.

• If premiums were deducted, payouts are usually taxed as trading income.

Caution: Structuring the policy incorrectly could result in a tax charge. Always consult with your accountant and an IFA.

Key Person Insurance vs. Other Business Protection Policies

Policy	Who’s Covered?	Who Receives the Benefit?	Purpose
Key Person Insurance	Key employee or director	The business	Protect profits, cover replacement costs
Shareholder Protection	Shareholders	Other shareholders or the business	Buy out shares on death/illness
Relevant Life Plan	Employee	Employee’s family	Death-in-service benefit (tax-efficient)
Business Loan Protection	Guarantor or borrower	The business or lender	Repay outstanding loans

These can be complementary. Many businesses combine Key Person Insurance with Shareholder Protection to cover both operational and ownership risks.

How to Set Up Key Person Insurance (Step-by-Step)

1. Identify the Risk

• Who are your most valuable people?

• What impact would their absence have?

• Do you rely heavily on one founder, partner, or specialist?

2. Quantify the Financial Exposure

Work with your accountant and financial adviser to assess:

• Profit contribution

• Operational disruption

• Loan exposure

• Recruitment and training costs

3. Select the Right Policy

Choose a reputable provider and decide:

• Level of life cover

• Whether to add critical illness

• Length of the policy (typically 5–10 years)

4. Decide on Policy Ownership

• The business should own the policy and be the beneficiary.

• For partnerships or LLPs, a business trust may be appropriate.

5. Review Annually

As the business evolves, so do your risks. Review cover levels, key individuals, and policy structure every year or after major changes.

Common Mistakes to Avoid

❌ Not Reviewing Cover

What was right when you started may be inadequate as the business grows. Regular reviews are essential.

❌ Covering the Wrong Person

Don’t insure by title—insure by impact. A technical specialist may be more critical than the managing director.

❌ Assuming Life Cover Is Enough

Many disruptions come from illness, not death. Critical illness cover is a valuable addition.

❌ Getting the Tax Structure Wrong

An incorrect setup can lead to a surprise tax bill. Always coordinate with your accountant.

Who Should Consider Key Person Insurance?

• Small and medium-sized businesses that rely on a few individuals

• Family businesses where succession planning is critical

• Medical, legal, and accountancy practices with key fee earners

• Startups and tech firms with specialist founders or coders

• Companies with business loans guaranteed by individuals

In short, any business that would suffer financially from losing a key individual should consider this cover.

How Rise Wealth Can Help

At Rise Wealth, we work with business owners, directors, and professionals across the UK to implement protection strategies that ensure business continuity.

As independent advisers, we:

• Compare the entire insurance market for the best terms

• Ensure your policy is structured correctly

• Liaise with your accountant to optimise tax efficiency

• Integrate business protection with personal financial planning

Whether you’re a medical consultant running a private clinic or the owner of a growing SME, we help you plan for the worst—so your business survives and thrives.

Let’s Secure the Future of Your Business

Is your business financially prepared for the unexpected?

Book a discovery call with Rise Wealth today. We’ll review your risk exposure and help you put a protection strategy in place that gives you—and your team—peace of mind.

📍 Based in Harrogate, serving clients across the UK

🧠 Independent, expert financial advice tailored to your business

Because your business depends on people. Let’s make sure it doesn’t fall apart without them.