Key man insurance for a sole trader, a partner or a director is possible, but who takes out the policy, and who it pays, depends on how the business is set up in law. Insurers call it key person protection, and for an owner-run business it is often a policy on your own life.

Royal London's adviser guidance says a sole trader "could take out a plan on their own life and write the plan in a trust for the benefit of their family". To have an FCA-authorised broker go through which route fits your own business, ask for a free call-back from one by completing the form on this page.

Who can be insured, and what is insurable interest?

Insurers' business protection documents start from the same test: whoever buys the cover must stand to lose money if the person insured dies or becomes seriously ill. Legal & General's Key Person Protection Technical Guide (W13226, June 2026), written for advisers, puts it for businesses like this: "In order for a business to insure one of its key people it must show that it stands to suffer a financial loss of profits as a result of the death, terminal or critical illness (if chosen) of that employee."

Aviva's Business Protection Term Assurance Cover Details (EDCO1589 0126), part of the policy a business protection customer receives, say that the owner, whether you or the business, needs an insurable interest in the life covered at the start, and add: "You’ll always have an insurable interest in your own life and the life of your spouse or civil partner." For anyone else, Aviva says an interest may exist where you could reasonably expect a financial loss on their death or illness, and where the owner and the person covered differ it may ask for evidence of it. Under those terms a sole trader insuring their own life already has the interest; a policy on an employee or a fellow partner rests on what losing them would cost.

In practice that gives two shapes. Either you insure your own life, or the business, or the other owners, insure someone whose loss would cost them money. The next sections take each business type in turn; what key person insurance is for explains the cover itself.

Can a sole trader take out key man insurance on themselves?

A sole trader has no separate company to own a policy, so Royal London's guidance describes the sole trader insuring their own life and putting the plan in trust for their family. The aim it gives is that the family has money to settle business liabilities, a loan for example. The trust normally carries a carve-out: a sole trader who is still alive 30 days after a critical illness diagnosis has the proceeds held for them instead.

Aviva's adviser literature (AL15009, July 2026) sets out the same arrangement in an illustrative example it says is not a real case: the sole trader's own-life policy can be written in trust for their family or dependants, or for the sole trader if they suffer a critical illness. It adds that "a trust might not be suitable in all instances", so the set-up is a decision to take with a legal or financial adviser.

Where a sole trader employs someone the business depends on, the arrangement changes. Royal London's guidance says the sole trader can also insure that other key person's life, so that funds are available to meet the business's responsibilities if that person dies or becomes critically ill.

How do partners insure themselves or each other?

Legal & General's guide explains why partnerships are different. Outside Scotland, a partnership has no legal identity separate from its partners, so it cannot own a policy; the partners own any policy themselves. In Scotland, the guide says, a partnership is a separate legal entity and can apply for the policy itself.

For a partner who is the key person, Royal London's guidance describes the partner taking out a plan on their own life and writing it in trust for the other partners in the firm, who usually make matching arrangements of their own. If the key person is an employee rather than a partner, the same guidance says one of the partners takes out the plan on that employee's life and writes it in trust for the partners.

Can directors take out key person cover on themselves or each other?

A limited company can hold a policy, which is the main difference from the two cases above. Legal & General's guide says the company applies for the policy and, on a valid claim, the proceeds are paid to the company. Royal London's guidance says a limited liability partnership can do the same, because in law it is a separate person.

Royal London also describes a second route for a shareholding director: the director takes out a plan on their own life and writes it in trust, with the other shareholders as potential beneficiaries, who can then put capital into the business if it is needed. So the company benefits in the first case and the other shareholders in the second. If the aim is cover for a director's own family rather than for the business, key person insurance compared with relevant life cover sets out the difference.

Business typeWho takes out the policyWho receives the payout
Sole traderThe sole trader, on their own life (Royal London)Trustees, for the family; usually the sole trader if they survive a critical illness diagnosis by 30 days (Royal London, Aviva)
Partnership, England, Wales and Northern IrelandA partner, on their own life or on a key employee (Royal London, Legal & General)Trustees, for the other partners
Company or LLPThe business, on the key person's life (Royal London, Legal & General)The business

Where does personal life cover or partnership protection fit instead?

Key person cover protects the business from losing someone. Two other arrangements answer different problems. For a sole trader, Aviva's adviser literature says "As sole traders are the business owners, there are no other shareholders or partners", so shareholder and partnership protection "isn't necessary". It points instead to the family left without an income if the sole trader dies or becomes seriously ill, and to other forms of protection that replace lost income. The options for the self-employed are set out in life insurance for the self-employed, and death in service cover for self-employed people covers the group-style equivalent.

For partners, the problem is ownership. Aviva says "a partnership will automatically dissolve if any of the business partners die unless an agreement exists to the contrary". Royal London describes partners each taking a plan on their own life in trust for the others, with a cross-option agreement so the survivors can buy the share. Business protection insurance compares those policies with key person cover, and the business and workplace cover guides collect the rest. A broker can weigh these against your own firm's circumstances once they have rung you back.

Whether premiums are an allowable expense is a tax question with its own answer in is key person insurance tax deductible.

Frequently asked questions

What happens to a partner's policy if they leave the firm?

Legal & General's guide says "Where a partner is a key person and the policy is written in trust, the policy would automatically revert to the key person." It warns that the tax treatment can be complicated and strongly recommends specialist advice.

Who pays the premiums on a partnership policy?

Legal & General's guide says the partnership would usually pay the premiums, including in Scotland where it owns the policy.

Is key man insurance worth it for a sole trader?

That depends on what the business would lose and who would be left to settle it. Is key person insurance worth it weighs the question, how to calculate key person insurance covers the amount, and the cost page the price.

Sole trader, partner or director, a broker can explain what the insurers they work with would arrange for your set-up: you request that through the form here, and the call-back is free.

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