Key Person Insurance vs D&O Insurance
Key person insurance pays your company a lump sum if a named individual dies or, where chosen, is diagnosed with a critical illness, and directors and officers insurance pays legal defence costs and damages if a director or officer faces a claim, civil suit or regulatory investigation over an alleged wrongful act. The one difference that decides it is the direction of the risk: are you worried about losing your key person, or about someone coming after them?
The short answer
A life and critical illness style policy the company owns and pays for on a named individual. If that person dies or is diagnosed with a covered critical illness where that option has been added, the insurer pays a lump sum to the business so it can absorb lost profit, recruitment costs and disruption while it recovers.
An annual liability policy, usually shortened to D&O and sometimes sold as management liability cover. It responds when a director, officer or senior manager faces an allegation of a wrongful act carried out in that role, covering legal defence costs and, where applicable, damages or settlements. Wrongful act is typically defined broadly enough to include most breaches of legal duty.
The trigger. Key person insurance responds to something happening to a person. D&O responds to something being alleged about a person. Key person insurance pays the business a lump sum. D&O mostly pays lawyers, and in doing so protects the individual’s personal assets. Neither one covers the other’s risk, which is why framing this as a choice can leave a gap.
One more structural difference worth knowing. Key person insurance is usually written for a fixed term with premiums set at outset. D&O is written on a claims-made basis and renewed annually, meaning it responds to claims notified during the policy period, which is why run-off cover matters if a company is sold, wound up or you step down.
Companies are specifically permitted to buy and maintain this insurance for their directors under section 233 of the Companies Act 2006, which matters because a company generally cannot simply indemnify a director against liability owed to the company itself.
Which is right for you?
- One or two named individuals bring in most of your revenue or hold the client relationships
- You would need months to recruit and train a replacement, and would lose margin while you did
- A lender, investor or major customer has asked what happens to the business if a specific person dies
- You have technical or product knowledge sitting in one person’s head that is not written down anywhere
- Your business could survive the loss of the person, but only by burning reserves you would rather keep
- You already have shareholder protection and business loan protection in place, and the remaining exposure is lost profit
- You have taken external investment, or have shareholders who are not involved in running the business
- You employ people, which brings employment related claims into scope for you personally
- You operate in a regulated sector, or one where the HSE, HMRC or a sector regulator could investigate
- The business is under financial pressure, because insolvency is when claims against directors tend to surface
- You are a non-executive or newly appointed director wanting to know what protects you personally
- You are buying, selling or restructuring a company, where warranty and duty disputes are more likely
Side-by-side comparison
| Comparison | Key person insurance | D&O insurance |
|---|---|---|
| Type of insurance | Protection, a life and critical illness product. | General insurance, a liability product. |
| What triggers a claim | Death, or diagnosis of a covered critical illness if added. | An allegation, claim, suit or regulatory investigation against an individual. |
| What it protects | The company’s profit and continuity. | The individual’s personal assets, and the company’s balance sheet via defence costs. |
| Who owns and pays | The company. | The company, usually. |
| Who receives the money | The company. | Mostly paid to or on behalf of the insured individual as defence costs and damages. |
| Tax treatment of premiums | May be allowable where HMRC’s Anderson principles are met, though it is not automatic. | Usually an allowable business expense for the company.Relief is more predictable |
| Tax treatment of the payout | Usually a taxable trading receipt where premiums were allowed, and in some cases not taxed where they were not. | Not income, since it settles a liability rather than adding profit.Not a taxable receipt |
| Benefit in kind position | Not applicable, the company is the beneficiary. | A benefits code charge technically arises, but a matching deduction is usually available under section 346 ITEPA 2003, so there is often no net tax cost. |
| Medical underwriting | Yes, based on the individual’s age, health and occupation. | No health questions. Underwriting is based on the business and its claims history.Nothing to underwrite medically |
| Policy basis | Fixed term, premiums usually set at outset.Premiums known at outset | Annual and claims-made, priced at each renewal. |
| Cover after you leave or the company closes | Cover ends, but the risk it covered has ended too.No run-off problem | Needs run-off cover, otherwise later claims may not be covered. |
| Main cost drivers | Age, health, occupation, sum assured, term. | Turnover, sector, balance sheet, claims history, limit of indemnity. |
| Complexity to arrange | Low to moderate. Needs a defensible valuation of the person to the business.Slightly simpler to arrange | Moderate. Needs the right limit, extensions and definitions reviewed. |
| Who it suits | Businesses where one or two people drive most of the profit. | Businesses with investors, employees, regulatory exposure or insolvency risk. |
| What happens without it | The business funds lost profit and recruitment from cash flow. | Directors may fund their own defence personally, and defence costs mount before any finding of fault. |
The highlighted cells show where one product has the edge on that row, not that it is the better product overall. They cover different risks and many businesses end up with both. Tax treatment depends on your circumstances and on legislation, both of which can change. HMRC allowability of key person premiums is not automatic and can be a matter for your local inspector, and D&O cover cannot extend to fines or penalties for criminal acts. Ask your accountant to confirm the position in writing. Cover is subject to underwriting and acceptance.
Real-world scenarios
Illustrative examples showing how the decision tends to play out. Businesses, names and figures are invented for illustration only, and are not quotes or a guarantee of cover.
The business that loses its revenue engine
A recruitment firm of twelve people has one director who personally handles the three contracts producing roughly £220,000 of annual gross profit. She dies unexpectedly, and the remaining directors estimate eighteen months to rebuild those relationships.
Read the full scenario
Key person insurance sized at around £400,000 could give the company the cash to keep paying salaries, hire a senior replacement and hold the contracts together.
D&O would do nothing here, because nobody has alleged anything against anyone.
- Gross profit at risk£220,000
- Cover£400,000
- Rebuild time18 months
The director facing an investigation
A manufacturing company’s operations director is named personally in a health and safety investigation following a serious workplace injury, and separately in a discrimination claim brought by a former employee.
Read the full scenario
Defence costs across both matters run to an illustrative £95,000 before any finding is made. Without D&O, the company may be unable to indemnify him fully for some of that exposure, and he could be funding legal representation from personal savings.
Key person insurance would not respond, because he is alive and working.
- Defence costs£95,000
- Matters runningTwo
- Finding of faultNone yet
The edge case, the company that closes
A software company is sold, and the two founders step down. Eighteen months later the buyer alleges breach of duty in the period before completion.
Read the full scenario
D&O is written on a claims-made basis, so the policy that was in force during the alleged conduct will not respond to a claim notified after it lapsed. Run-off cover, arranged at the point of sale and usually running for six years to align with limitation periods, is what would have covered this.
Key person insurance was correctly cancelled at the sale, because the risk it covered had ended. This is the gap that most often catches people out.
- Claim arrives18 months after sale
- Run-off termUsually 6 years
- Policy basisClaims-made
The rule of thumb
Key person insurance covers you losing the person. D&O covers someone coming after the person.
Frequently asked questions
Is key person insurance the same as D&O insurance?
Does key person insurance cover critical illness or only death?
Can I take out key person insurance on a business partner or co-director?
Who owns the policy and who receives the payout?
Does key person insurance cover legal claims made against directors?
What happens to the policy if the key person leaves the business?
Related decision guides
Not sure which risk to cover first?
Speak to a business protection specialist at IGotCover. We will work out who the business depends on, size the key person cover against something you can evidence, and be straight with you about where a commercial lines broker is the right next call. Free, and with no obligation.
Get a Free Quote →Important information: This guide is for general information purposes only and does not constitute financial, legal, or tax advice. Tax treatment depends on individual circumstances and may change in the future. All figures and scenarios are illustrative only and do not represent a guarantee of cover, premium, or payout. Eligibility for cover is subject to insurer underwriting criteria and acceptance. You should seek advice from a qualified financial adviser and, where relevant, a solicitor or tax adviser before taking out any policy or entering into a legal agreement. Insurance provider benefits are subject to change. IGotCover is a trading name of Caspian Assured Ltd, authorised and regulated by the Financial Conduct Authority (FCA reference [FRN]).
