Key Person Protection

What is Key Person Protection?

Key Person Protection is designed to protect a business against the financial impact of losing an individual whose skills, relationships, expertise or leadership are critical to its success.

The company owns the policy, pays the premiums and receives any claim proceeds. The funds can be used to help maintain profitability, recruit a replacement, retain clients and support business continuity during a difficult period. Policies are usually arranged as level term life assurance, often with critical illness cover included.

Research published by Scottish Widows in 2026 found that 94% of SMEs rely on more than one key individual, yet almost half have never taken advice on business protection.

Who Counts as a Key Person?

A key person is anyone whose absence would have a material impact on the business.

Examples include:

• Managing directors and senior executives
• Top-performing salespeople
• Technical specialists
• Business development managers
• Country managers running UK subsidiaries
• Individuals holding critical client relationships

A simple test is to ask:

• How long would it take to replace them?
• What would happen to profits during that period?

If the answer is “significant disruption”, they are probably a key person.

Why UK Subsidiaries Face Greater Risk?

Many UK subsidiaries are heavily reliant on one or two individuals who have built local relationships, understand the market and oversee day-to-day operations.

If that individual is no longer available, the parent company may face:

• Delays in finding a replacement
• Loss of key clients
• Reduced revenue
• Operational disruption
• Increased recruitment costs

Group protection arranged by the overseas parent company may not always provide funds directly to the UK entity suffering the loss. For this reason, UK subsidiaries should assess their protection needs independently.

How Much Cover Do I Need?

There is no single correct answer. The objective is to quantify the financial impact of losing that individual. Three common methods are used.

1. Multiple of Remuneration

A straightforward approach is:

• Life cover: 5 to 10 times remuneration
• Critical illness cover: up to 5 times remuneration

For someone earning £120,000, this could justify between £600,000 and £1.2 million of cover.

2. Share of Gross Profit

This is often the preferred method for insurers.

Individual salary ÷ total payroll × gross profit × recovery period

For example:

If the business would take three years to recover, a life cover requirement of approximately £450,000 may be appropriate.

3. Cost of Replacement

This considers:

• Recruitment fees
• Interim management costs
• Training and onboarding
• Lost productivity

This approach can be useful for highly specialised roles.

Why Consider Critical Illness Cover?

Many businesses arrange life cover only. However, a serious illness is often more likely than death during an individual’s working life and can create significant financial disruption.

Critical illness cover can help fund:

• Temporary management support
• Recruitment costs
• Additional staffing
• Protection of key client relationships
• Maintenance of business operations

For many businesses, losing someone to illness for 12 to 24 months can be more disruptive than an immediate death claim.

What Does It Cost?

Premiums depend on:

• The amount of cover
• Policy term
• Age and health
• Smoker status
• Whether critical illness cover is included

As an illustration:

Illustrative example based on a healthy 38-year-old non-smoker. Actual premiums will vary.

Many business owners are surprised by how affordable life cover can be relative to the potential financial risk.

Does Group Life Cover the Business?

No. A group life scheme (death-in-service) pays benefits to an employee’s family or beneficiaries. Similarly, a Relevant Life policy is designed to provide a personal death benefit.

Neither arrangement compensates the business for lost profits, recruitment costs or operational disruption. Key Person Protection is designed specifically for the benefit of the company.

What About Tax?

The tax treatment depends on the purpose of the policy and the circumstances of the business.

Broadly speaking:

• Premiums may qualify for corporation tax relief where the cover is intended to protect trading profits.
• Where premiums are allowable, claim proceeds are often taxable.
• Where premiums are not allowable, claim proceeds may fall outside the tax charge.

As treatment varies, businesses should confirm the position with their accountant or tax adviser before arranging cover.

Common Mistakes

The most common issues we see are:

• • Insuring the wrong person.
  • Choosing a cover amount without any calculation.
  • Ignoring critical illness cover.
  • Assuming a group life scheme protects the business.
  • Forgetting about loans or personal guarantees.
  • Failing to review cover as the business grows.
  • Allowing cover to expire without replacement.

What Should You Do Next?

If your business relies heavily on one or two individuals, it is worth reviewing the financial consequences of losing them.

A proper review should identify the key individuals, quantify the potential loss to the business and establish an appropriate level of cover that can be justified to insurers and, if necessary, HMRC.

The cost is often modest when compared with the potential loss of revenue, profits and client relationships that can arise from the unexpected loss of a key member of the team.

This guide is for general information only and does not constitute financial, tax or legal advice. Tax treatment depends on individual circumstances and may change in the future.