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What Is Key Person Insurance?
Key Person Insurance is a life or critical illness policy that provides a financial safety net if a crucial member of your team—such as a founder, top salesperson, or specialist—passes away or becomes seriously ill. The policy pays out a lump sum directly to your business, helping to cover lost revenue, recruitment costs, or loan repayments, ensuring your company remains operational during challenging times.
Why Is It Essential?
- Business Continuity: The sudden loss of a key individual can disrupt operations. This insurance ensures you have the resources to navigate such disruptions.
- Financial Stability: Helps cover immediate expenses like wages, supplier payments, and recruitment costs.
- Investor Confidence: Demonstrates proactive risk management, reassuring investors and stakeholders.
The Risks of Not Having Coverage
- Operational Disruption: Losing a key person can halt projects, delay deliveries, and impact client relationships.
- Financial Strain: Without the safety net, businesses may struggle to meet financial obligations, leading to potential insolvency.
- Loss of Clients and Contracts: Key individuals often hold vital client relationships; their absence can result in lost business.
How Can the Payout Be Used?
- Recruitment and Training: Cover the costs of hiring and training a replacement.
- Debt Repayment: Settle outstanding loans or financial obligations.
- Operational Costs: Maintain day-to-day operations during the transition period.
- Business Restructuring: Invest in restructuring efforts to adapt to the change.
Please note: Tax treatment depends on individual circumstances and may be subject to change
get your personalised risk snapshotWho Qualifies as a Key Person?
Any individual whose skills, knowledge, or experience are vital to your business's success, including:
- Founders and Co-founders
- CEOs and Managing Directors
- Top Salespeople
- Specialist Technicians or Engineers
- Employees with critical client relationships
The Stats!
Small Business Failure Rates
- First-Year Failures: Approximately 20% of small businesses in the UK fail within their first year.
- Three-Year Survival: Around 60% of new businesses fail within the first three years.
- Five-Year Survival: Only about 40% of new businesses survive beyond five years.
Impact of Losing a Key Person
While specific recent UK statistics on the impact of losing a key person are limited, it's widely acknowledged that the sudden loss of a critical team member can significantly disrupt operations, affect client relationships, and lead to financial instability.
Prevalence of Key Person Insurance
According to Legal & General's State of the Nation report, nearly all businesses (99%) have at least one key person, yet only 18% have Key Person Insurance in place.
Business Closures and Economic Challenges
- In 2024, 44% of UK businesses reported coming close to shutting down due to economic challenges.
- Company insolvencies in England and Wales rose by 13% in November 2024, reflecting a weakening economy.
Understanding the Risk of Serious Illness in the Workplace
Serious illnesses can strike unexpectedly, impacting not just individuals but the businesses they help drive. Recent data underscores the importance of being prepared:
- In 2024, the average age for critical illness claims was 52, with the youngest adult claimant being just 25 years old.
- As of early 2024, approximately 2.8 million people in the UK were economically inactive due to long-term sickness, highlighting the widespread nature of serious health issues.
These statistics highlight that serious illnesses are not confined to older age groups; they can affect individuals at any stage of their careers. For businesses, especially small to medium-sized enterprises without substantial financial buffers, the sudden loss of a key employee due to illness can lead to operational disruptions, financial strain, and challenges in maintaining client relationships.
Implementing Key Person Insurance is a proactive step to safeguard your business against the unforeseen absence of vital team members. This coverage provides financial support to help manage the costs associated with recruiting and training replacements, covering lost revenue, and ensuring business continuity during challenging times.
If you need assistance in exploring Key Person Insurance options tailored to your business needs, feel free to reach out.
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Get the facts
Download our guide to Key Person Insurance to discover how important it could be to your company’s survival should the unexpected happen.
Get the guideFAQs
Who is a key person?
A key person is an individual whose skill, knowledge, experience or leadership contributes to the continued financial success of the business. A key person may be anyone whose death could lead to a financial loss for the business.
This might be a loss of profits if you lost your best salesperson, the cost of having to recruit or train a replacement or important personal or business contracts lost due to the key person not being there to maintain a contract.
Can partners take out Key Person cover on each other?
Yes, a partner could take out their own life policy and place it under trust for the other partners. In the event of a valid claim the policy proceeds would be payable to the trustees who would in turn pay the partners as beneficiaries of the trust. The partnership would usually pay the premiums.
What happens if the key person leaves or retires?
If a key person were to leave or retire before the end of the Key Person Protection policy term, the business could stop paying the premiums allowing the policy to lapse. Alternatively, the company may choose to continue paying the premiums until the end of the policy term and in the event of a claim, the business would receive a capital sum.
Who should be covered by Key Person Insurance?
The obvious choice of key person will normally be some or all of the partners or members in the business. However, it is worthwhile to consider the impact on the business of losing someone who may not have any financial stake in the business but nevertheless plays a fundamental role in its success.
Consider the individuals within your business and ask yourself:
- Would the loss of that person negatively impact or slow down any ongoing projects?
- How easy would it be to replace that person’s expertise?
- Is that individual essential to your business growth?
- Would the loss of that person detriment any customer or supplier relationships?
- Would the business miss their contribution?
- Are there any financial matters, such as bank loans that are dependent upon that key person?
If I don’t take out Key Person Insurance what are the consequences?
The consequences of losing a key person vary on the role of that individual and your business model. There are common factors to consider though, such as without the leadership of you or your key person your employees may decide it’s time for them to move on. Perhaps your customers may choose to go elsewhere and/or your sales revenue could fall. Potentially it could create a lack of confidence from your lender, suppliers, customers, and your other employees. Bank loans and overdrafts could be called in and your suppliers may demand payment upfront.
How likely is it that a Key Person will need to Claim?
Likelihood of a Critical Illness – Likelihood of at least one partner or director getting a critical illness before age 65 Source CIBT02 Based on 1971-2003 population data and experience, published in SIAS paper Exploring the critical path, 2006. Males’ standalone, extended cover, including own occupation total and permanent disability.
Likelihood of Death – Likelihood of at least one partner or director dying before age 65 Source www.actuaries.org.uk. Based on mortality data from TMNOO (temporary assured lives, male non-smokers, 1992-2002) at five plus years duration.
How much should I insure my key people for?
There are no hard and fast rules when assessing the financial value of a key person. Each key person must be dealt with on their own merits. A primary method of calculating the key person’s worth is as a multiple of the company profits, the standard multiples are 2 x gross profit or 5 x net profit.
Alternatively, some firms calculate the value as a multiple of that person’s salary. Up to ten times gross salary may be considered for a rapidly expanding business.
Your Broadbench adviser will guide you through this calculation.
What’s the tax position for Key Person Insurance?
Typically, tax relief is not allowed as in nearly all cases the key person being insured is a major shareholder of the business. Just because the policy may not qualify for tax relief does not mean that the company should not take key person insurance. It just means they will not get tax relief on the premiums.