If you’re exploring business protection, you’ve probably come across the term key person. But who exactly counts as a key person in a UK business, and how do you know if your company needs to insure them?
In this guide, we’ll explain what a key person is, who typically qualifies, and why it matters when setting up key person insurance
What is a key person?
A key person is someone whose skills, knowledge, or financial input are vital to the success of a business. If that person were to die or become seriously ill, it could cause severe disruption, loss of income, or even put the future of the business at risk.
Key person insurance is designed to provide a financial buffer if that happens. It pays out a lump sum to the business to help cover lost profits, recruitment costs, or other essential expenses.
Who usually qualifies as a key person?
There’s no fixed rule, but here are the most common examples of people who might be considered key:
1. Business owners and founders
If the business relies heavily on the vision, drive, or decision-making of one or two founders, they’re likely key people.
2. Company directors
Especially in smaller businesses, directors often wear multiple hats and make high-level decisions. Their absence could stall the business.
3. Top salespeople or rainmakers
A salesperson who generates a significant portion of the company’s revenue is a clear candidate for key person status.
4. Specialist staff
Think of software developers, designers, consultants, or engineers whose skills are difficult or expensive to replace.
5. Financial controllers
This could be a CFO, bookkeeper, or finance manager who handles critical financial operations.
What’s the impact of losing a key person?
The loss of a key person can lead to:
- Loss of profits
- Delayed projects
- Cancelled contracts
- Reduced investor confidence
- Difficulty accessing loans or funding
- Increased recruitment and training costs
In some cases, the business might not survive the disruption. That’s why key person insurance exists – to help companies stay afloat during difficult times.
Does HMRC define who a key person is?
HMRC doesn’t provide a strict definition of a key person. However, they do expect the business to justify why someone is insured under a key person policy. This becomes important if you’re trying to claim tax relief on premiums, which is only allowed in certain situations.
How much cover do you need?
There’s no one-size-fits-all figure, but you might consider:
- A multiple of the person’s salary or profit contribution
- The cost of replacing them
- The projected loss in profits over a specific period
Working with a business protection adviser can help you calculate a realistic level of cover based on the size and structure of your company.
FAQs
Can more than one person be insured?
Yes. Businesses can take out multiple key person policies to cover several individuals. Each policy is tailored to the person’s role and financial impact.
Is key person insurance a benefit in kind?
No. The policy benefits the business, not the individual. There’s usually no income tax liability for the person being insured.
Can shareholders be covered?
Possibly, but if the person owns a significant share of the company, the tax treatment of the policy may change. In some cases, HMRC may view the policy as benefiting the individual rather than the business.
Final thought
A key person is anyone your business couldn’t do without, at least not without severe disruption. If the loss of one person would leave your business struggling, they’re a key person. And it’s worth protecting your company against that risk.
Key person insurance gives you time, money, and options when the worst happens. It’s not just about planning for disaster – it’s about keeping your business strong through uncertainty.
Need help identifying who your key people are and what kind of cover you need? Our team can guide you through the process.
