Fewer than one in five small businesses have key person insurance — yet every business has someone whose sudden absence would cause serious financial damage.
Key person insurance pays a lump sum to the business when a critical individual dies or is diagnosed with a critical illness. The business pays the premiums, owns the policy, and receives the payout. It is one of the most straightforward and cost-effective forms of business protection available.
What it covers:
• Lost revenue during the search for a replacement
• Recruitment and training costs (easily £50,000+ for senior roles)
• Loan repayments if the key person personally guaranteed business borrowing
• Working capital to stabilise operations during the transition
How much cover? Common approaches include five to ten times annual salary, or a calculation based on the revenue or profit the individual generates. For those with personal guarantees, the cover should be sufficient to clear the debt.
Tax treatment: If the policy protects against lost profits, premiums are usually deductible but the payout is taxable. If it covers loan repayment, premiums are not deductible but the payout is tax-free. Take advice on the right structure.
The estate planning connection: Key person insurance helps maintain business value after a death, which protects Business Property Relief eligibility and ensures the deceased’s family receives fair value for their shares.
A £500,000 policy for a healthy 45-year-old typically costs £30–60 per month. That is a fraction of the cost of losing a key person with no financial cushion.