Key Person Insurance

Key person insurance helps protect a business against the financial setback of losing someone vital — through death or prolonged incapacity. There's no strict legal definition, but the purpose is simple: a financial safety net that supports business continuity.

How it works

A small or medium-sized business takes out a policy on an individual whose role significantly affects the company's success. Rather than indemnifying actual losses, it pays a fixed sum — set out in the policy — on the key person's death or critical illness, helping to cushion the impact on profits and keep the business running. The policy term is matched to how long that person is important to the business.

Who counts as a key person?

Anyone whose absence could cause financial strain — directors, partners, influential salespeople, project managers, or people with specialist skills or knowledge the business depends on.

Tax treatment

Premiums are often treated as an allowable business expense for corporation tax, provided certain conditions are met:

• The relationship is employer and employee (with exceptions for shareholding directors).
• The policy is designed to cover loss of profits only.
• The term doesn't extend beyond the person's usefulness to the business.
• The employee doesn't hold a significant shareholding (usually less than 5%).

Where premiums are allowable, the tax treatment of any proceeds can vary, so each case should be checked. Proceeds usually escape tax unless paid in instalments.

Worth knowing

These plans have no cash value during the term and will lapse if premiums stop. Tax rules depend on legislation and individual circumstances and can change, so it's worth confirming the position before setting a policy up.

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