Key person insurance is a policy a business takes out on someone whose death or critical illness would hurt its profits, so that the business, not the person's family, receives the payout. In practice, that is what key person insurance is for: giving a company money to cover lost profit, find and train a replacement, or deal with a loan if a person it depends on dies or is diagnosed with a critical illness.

Weighing up whether your business needs it? An FCA-authorised broker can explain how insurers would view the company and the person it wants to cover; the quote form on this page reaches one, free of charge.

What is key person insurance for?

Royal London's adviser guidance on key person insurance (15 September 2025) defines the person it protects like this: "A key person is anyone whose death or disability would have a serious effect on the company’s future profits." The same guidance says "The size of an individual’s shareholding level is not necessarily a good indicator of who is a key person, as a non-shareholding employee could easily be key to the business."

Legal & General's Key Person Protection Technical Guide (W13226, June 2026), written for advisers, describes the idea in one sentence: "It’s simply a business insuring itself against the financial loss it may suffer as a result of the death (or critical illness if chosen) of a key person." It lists the kinds of loss involved, among them "Loss of profits" and "Having to recruit or train a replacement".

That is the main difference from ordinary life insurance, where a person buys cover on their own life for their family. In Aviva's words (Business Protection Term Assurance Cover Details, EDCO1589 0126), "Business Protection is designed to protect a company financially when its owners or employees are affected by illness or death." Cover bought for a family is in our term life insurance guide.

Who owns the policy, who pays and who receives the payout?

Usually the business does all three. Aviva's Cover Details say: "If a business applies for Business Protection Term Assurance on your life or the life of another person or persons, the business will be the owner of the cover. This means they’ll be the beneficiary of the cover in the event of a claim, unless they chose to assign the cover or place it in trust." Royal London's guidance puts it as "the company owns the plan, pays the premiums and receives the proceeds", and in that case sees no need for a trust.

The person covered is not the owner and does not receive the money, though Legal & General's guide says they complete personal and medical details and "also sign the application as the life insured". Aviva also asks for a link between the business and the person: "You or the business must have an insurable interest in the person covered at the time Business Protection Term Assurance is taken out."

A partnership is different in England, Wales and Northern Ireland. Legal & General's guide says "A partnership in England, Wales and Northern Ireland cannot be the owner of a policy because it does not have a separate legal identity", and that a partner "could take out an own life plan, and write it in trust at outset for the other partners". Trusts are explained in our guide to life insurance trusts, and ownership and beneficiaries in more detail in who owns key person insurance.

How is the amount of key person cover worked out?

Royal London's guidance says "There are no specific rules when assessing the financial value of a key person." What follows are the methods two insurers' adviser guides describe, as their own guidance and not a standard every insurer applies.

A multiple of profit. Royal London calls this "the main way of calculating a key person’s worth" and gives "The normal multiple is:" 5 x net profit. It adds "The profit may need to be split where there’s more than one key person. It would be apportioned according to contribution." Legal & General's guide gives two profit formulas, "up to 2 x proportion of gross profit directly attributable to key person;" and "up to 5 x proportion of net profit directly attributable to key person;", and says "In all the above formulas an average of the last two years profit figures would routinely be used."

A multiple of earnings. Legal & General's guide says "A simple formula is to take a multiple of the key person’s earnings. This can often be up to 10 times the key person’s earnings for death, with a lower figure considered for critical illness." Royal London says a multiple of gross salary "might be up to 10 times gross salary for life cover and up to 5 times gross salary for critical illness cover", but warns that "for shareholding employees, an accurate measure of the key person’s worth to the business may not be related to their remuneration."

A loan. Legal & General's guide lists "The amount of the loan to be repaid on the death of the key person" as a third basis.

The two guides differ in detail, which is the point: the answer depends on the business, its accounts and what the insurer will accept. The step-by-step method, and whether a calculator helps, is on how to calculate key person insurance.

Have a figure in mind for your own company? An FCA-authorised broker can go over the working with you and check what evidence insurers may ask for; the company can reach one through the short form on this page, if that is useful.

Can key person insurance cover illness as well as death?

Yes, with some policies. Legal & General's guide says a business "can choose either Life Insurance or Life with Critical Illness Cover" and that "The effect of being diagnosed with a critical illness can be the same on the business as the death of the key person." Aviva's Business Life Insurance Options summary (AL15005 0926, served from Aviva's adviser site) describes the two choices: "Life cover pays out if the life covered dies during the policy term", and "Life and critical illness cover pays out if the life covered dies or is diagnosed with or undergoes surgery for a critical illness that meets our policy definition, during the policy term, and survives for at least 10 days." It adds "We only cover the critical illnesses we define in our policy and no others", so the definitions in the policy decide what pays.

Royal London says "Income Protection could also be taken out to provide a regular payment if the key person was off for any length of time." That is a different product; see income protection for business owners. Critical illness cover as it applies to a company is on critical illness cover for business, and the policy type itself in our life and critical illness guide.

How does HMRC treat key person insurance for tax?

This is HMRC's published position, not tax advice, and tax rules can change. HMRC's Business Income Manual, BIM45525 (page dated 1 April 2016, read 18 October 2026), describes "a policy insuring against loss of profits resulting from the death, critical illness, sickness, accident or injury of an employee, director or other ‘key person’", and sets two conditions: that the sole purpose is "the trade purpose of meeting a loss of trading income that may result from loss of the services of the key person, and not a capital loss", and that a life policy is term insurance "with no other benefits".

The manual links the two sides: "Where both conditions outlined above are satisfied, the premiums will be deductible, and sums received under such a policy will be income of the employer's trade". As a general rule, where they are not met, "the premiums cannot be deducted, and receipts under that policy are not taxed as trading income", though "No assurance can be given that any future receipt will be excluded from trading income even though the premiums are not allowable". BIM45530 adds that whether the sole purpose condition is met is "a question of fact". How this applies to a particular company is for its accountant to confirm; more is on whether key person insurance is tax deductible, and tax on payouts to individuals is in is a life insurance payout taxable?

How is key person insurance different from other business and work cover?

Key person cover pays the business for the loss of a person. Shareholder protection does a different job: in Royal London's adviser guide to business protection (8 September 2025), the surviving owners receive the proceeds "to enable them to fund the purchase of the shares of the deceased or critically ill business owner". The contrast is drawn in key person insurance and shareholder protection. Relevant life cover is a different product, compared in key person vs relevant life, and death in service, the cover an employer provides for its staff, is in do you need life insurance if you have death in service benefit. The wider choice is in business protection insurance, within our business cover guides.

Frequently asked questions

Is key man insurance the same as key person insurance?

Yes, key man is another name for the same cover. The insurer documents quoted here all use "key person".

What happens to the policy if the key person leaves the business?

The two insurers' documents quoted here differ. Aviva's Cover Details say "We need to be told if the person covered, as a key person or in connection with a business loan, leaves the business as we’ll cancel the cover from that point." Legal & General's guide instead lists choices for the business if a key person leaves or retires, including "Stop paying the premiums and the policy would then lapse", continuing to pay to the end of the term, or assigning the policy to the key person.

How much does key person insurance cost?

Nobody can give a fair figure without the person's age, health, the sum and the term; see what key person insurance costs. For actual quotes on a named key person, an FCA-authorised broker contacted via the form on this page can arrange them, with no fee.

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