Key Person vs Executive Income Protection
Both respond when illness or injury takes a critical individual out of the business. The difference is who the money protects. Key Person Insurance pays the company to absorb the commercial damage; Executive Income Protection replaces the individual’s own income. The question: whose finances are you protecting?
Protecting the business, the director’s income, or both? Compare cover on your figures.
Get a Free Quote →The short answer
A life or critical illness policy owned and paid for by the business, covering an individual whose loss would cause significant financial damage. Pays the company a lump sum on death or diagnosis of a specified illness, which the business can use for any purpose: replacing revenue, recruiting, or reassuring stakeholders.
An income protection policy owned and paid for by the company, covering a director or senior employee. If the individual cannot work due to illness or injury, it pays a monthly benefit to the company, which passes it to the individual as salary. Cover can typically include salary, dividends, and P11D benefits.
Key Person Insurance pays the business a lump sum to survive losing someone. Executive Income Protection pays a monthly benefit to keep the individual’s own income flowing while they recover. One protects the company’s finances; the other protects the person’s.
Which is right for you?
- One individual generates a disproportionate share of revenue or holds critical client relationships
- Losing that person would immediately threaten contracts, lending relationships, or investor confidence
- The business would face significant recruitment and transition costs to replace their expertise
- You need a lump sum the company can deploy flexibly in a crisis, not a monthly income stream
- The concern is the company’s survival and stability, rather than any one person’s household finances
- A director’s household depends on their salary and dividends, and illness would cut that income off
- The individual takes a low salary and high dividends, which personal income protection often cannot fully cover
- You want premiums paid by the company as a business expense rather than from post-tax personal income
- The individual has little or no sick pay provision beyond statutory sick pay
- The concern is a long illness or injury rather than death, and monthly income replacement matters more than a lump sum
Not sure which side you fall on? We will help you weigh it up.
Get a Free Quote →Side-by-side comparison
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Get a Free Quote →Real-world scenarios
Illustrative examples showing how the decision tends to play out. Names and figures are for illustration only.
An engineering firm reliant on its technical director
A precision engineering business of 22 staff depends on its technical director, Marcus, whose expertise underpins two major contracts worth £1.2 million a year.
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If Marcus died or was diagnosed with a serious illness, both contracts would be at risk and recruiting a comparable replacement could take a year or more.
A Key Person Insurance policy with critical illness cover, sized to reflect his contribution to gross profit, would give the company a lump sum to retain clients, fund interim expertise, and absorb the revenue shock while it stabilised.
Rachel, a director with low salary and high dividends
Rachel runs a marketing consultancy, drawing a salary of £12,570 and dividends of £70,000 per year. She has a mortgage and two children, and her company offers no sick pay beyond the statutory minimum.
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A personal income protection policy assessed on salary alone would leave most of her real income unprotected. Executive Income Protection arranged through her company could cover up to 80% of her combined salary and dividends, with premiums paid by the company as a business expense.
If a long illness stopped her working, the monthly benefit would flow through the company to her as salary, keeping her household finances intact while she recovered.
A software founder who is both the business and its income
Dev founded a software company and remains its lead developer and main client contact, generating most of its £600,000 annual revenue. He draws £12,570 in salary and £90,000 in dividends.
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A serious illness would create two simultaneous problems: the company would lose the person who generates its revenue, and Dev’s household would lose its income.
Key Person Insurance would give the business a lump sum to hire cover and protect client relationships. Executive Income Protection would separately replace Dev’s monthly income while he recovered. A financial adviser may recommend both, noting that neither policy can do the other’s job.
The rule of thumb
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Get a Free Quote →Frequently asked questions
Can a company have both Key Person Insurance and Executive Income Protection on the same person?
Does Executive Income Protection cover dividends as well as salary?
Is a Key Person Insurance payout taxable?
How long does Executive Income Protection pay out for?
What happens to these policies if the key person or director leaves the company?
Is Executive Income Protection better value than a personal income protection policy?
Related decision guides
Not sure which is right for you?
Speak to one of our advisers. We will compare both options based on your specific circumstances, free and with no obligation.
Get a Free Quote →This guide is general information about how these policies work and is not personal advice or a recommendation. Tax treatment depends on your individual circumstances and the rules may change. The figures in the scenarios are illustrative only. Named individuals in scenarios are entirely fictional and created for illustrative purposes only. Consider speaking to a qualified adviser before deciding what is right for you.
