Key person insurance is a policy your business takes out on the people it cannot afford to lose — the founder, the sales leader, the technical expert. If they die or suffer a critical illness, the business receives a lump sum to cover recruitment, lost revenue, loan repayments, or a share buyout.
Cover is typically calculated at two to five times their revenue contribution or five to ten times salary. For most UK SMEs, that means £250,000 to £2 million — with premiums of a few hundred to a few thousand pounds a year. If the policy covers lost profits, premiums are tax-deductible and the payout is taxable trading income.
Key person insurance is not the same as shareholder protection — you may need both. Without it, the loss of one critical individual can trigger a cascade: revenue drops, clients leave, lenders call in loans. The policy does not prevent the loss — it buys the time your business needs to survive it.