BUSINESS PROTECTION
What would the business lose with its key person?
Some people carry knowledge, revenue, relationships or leadership that cannot be replaced quickly. Key person cover can provide money to the business after a valid life or critical illness claim.
The name on the organisation chart is not the whole risk
A key person may be a founder, salesperson, technical specialist, clinician, relationship lead or employee with knowledge that holds an important process together. Their loss may reduce profit, delay contracts, weaken lender confidence or create an urgent recruitment need.
A key person policy is usually owned by the business. If the insured person dies or meets the selected critical illness definition and the claim is valid, the payment is made to the business. The money can provide working capital and time, but it does not replace the person or guarantee business survival.
The cover amount should reflect a measured financial exposure. It is not simply a multiple chosen to reach a large figure.
Why this matters
Legal and General's 2019 SME research found that 70 per cent of businesses surveyed had either not considered key person cover or did not understand it.
Who may be a key person
- A founder or director central to strategy, funding or customer confidence.
- A salesperson responsible for a material share of revenue.
- A specialist with scarce qualifications, licences or technical knowledge.
- A person whose reputation or relationships drive referrals and renewals.
- An operational lead whose absence would delay delivery or create regulatory risk.
Estimating the exposure
Possible approaches include a multiple of contribution to profit, the cost and time to recruit a replacement, the value of lost contracts, or a multiple of remuneration. The method should reflect the actual risk and be supported by accounts and business evidence.
Life and critical illness amounts may differ because the financial impact and recovery period differ. The term should reflect how long the person is expected to remain key and how quickly the business could reduce its dependency.
Using the payment
- Replace lost working capital or profit.
- Recruit, relocate and train a replacement.
- Retain clients and reassure lenders or investors.
- Fund temporary management or specialist support.
- Restructure, refinance or close part of the operation in an orderly way.
The person behind half of new revenue
Illustrative Scenario
A sales director generates a material share of new business and manages the company's largest relationships. A prolonged critical illness would affect both immediate revenue and the time needed to transfer those relationships. The cover calculation considers contribution to profit, recruitment time and client retention costs. It does not use salary alone, because salary understates the exposure.
What readers need to consider
- The company normally owns the policy and receives the claim. It is not a personal benefit for the insured person's family.
- Premium and claim tax treatment is not automatic and must be confirmed with the accountant.
- Financial evidence may be required to justify the sum assured.
- Critical illness cover pays only for specified conditions that meet the policy definition.
- Reducing dependency through succession planning, process documentation and shared client ownership is important alongside insurance.
Frequently Asked Questions
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Not automatically, but many owners are key because of revenue, leadership, guarantees or relationships. The assessment should identify the financial impact rather than rely on job title.
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The calculation can use profit contribution, replacement cost, remuneration or another evidence based method. The insurer may require accounts and an explanation of the chosen amount.
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Yes, where available and suitable. The policy pays only when a covered condition meets the insurer's definition.
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Possibly, but this depends on the purpose and circumstances. The business accountant should confirm the tax treatment of premiums and proceeds.
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The policy payment is generally made to the business, which can use it according to its needs. The intended use should still inform the amount and structure.
You do not need to know which policy you need before speaking to us. Tell us what you are worried about protecting, and we will help you understand the options.
Assess our key person riskERG Finance provides protection advice from across the whole of the market.
This page provides general information and does not constitute personal advice. Eligibility, underwriting, exclusions, definitions, waiting periods, claim periods and premiums vary by insurer and policy. Cover normally ends if premiums are not maintained. We will explain the features, limitations and costs of any policy we recommend. Key person cover is intended to protect the business, not the insured person's family. Tax treatment requires confirmation from the company's accountant.