Key Person Insurance Calculator

How much key person insurance do I need?

Most UK businesses size key person insurance at roughly 5 to 10 times the key person's annual remuneration, or 2 to 5 times the gross profit that person generates – whichever better reflects what losing them would actually cost. These multiples are underwriting conventions used across the UK market rather than rules set in law, so treat every figure on this page as an estimate to refine with an insurer or broker. The calculator above applies both methods, adjusts the point estimate for how hard the person would be to replace, and adds any business borrowing that depends on them. The company takes out the policy on the employee's life, the company pays the premiums, and the company receives the payout – the money is there to steady the business, recruit a replacement, reassure the bank and replace lost profit while you recover.

The two sizing methods insurers accept

When an insurer financially underwrites key person cover, it wants to see that the sum assured bears a sensible relationship to the person's economic value. Two approaches dominate:

• Multiple of remuneration. Take total annual remuneration – salary, regular bonus and benefits – and multiply by 5 to 10. Use the lower end for someone you could replace inside six months, the top end for a founder or rainmaker whose absence would be felt for years. This method suits businesses where the person's package roughly tracks their value.
• Multiple of profit contribution. Estimate the slice of annual gross profit that would realistically disappear with the person – contracts they personally hold, sales they close, output only they can deliver – and multiply by 2 to 5. This suits salespeople and technical founders whose value far exceeds their salary. Some underwriters instead work from a share of net profit with a higher multiple; the gross-profit convention used here is the more common starting point.

Where a lender has advanced money on the strength of one person – a director's loan-backed expansion, a personally guaranteed business loan – add the outstanding balance on top, because the bank may call in the debt or withdraw facilities if that person dies. Cover for loan protection normally runs for the loan term only.

Who counts as a key person?

A key person is anyone whose death or long-term incapacity would cause measurable financial damage. In small companies that is usually the founder or managing director. It can equally be the sales director who owns the three relationships that produce half your revenue, the engineer holding the product's know-how, or the finance director your investors insist on. Ask one question: if this person were gone tomorrow, would profit fall, would debt become harder to service, or would a contract be at risk? If yes to any, they are insurable as a key person. Sole traders and partnerships can use equivalent personal policies; limited companies use company-owned policies, which is what this page models.

What drives the premium

Premiums are individually quoted, and the spread between a healthy 35-year-old non-smoker and a 55-year-old smoker with health history is so wide that quoting one "typical" number would mislead. The main drivers are:

• Sum assured and term – more cover for longer costs more; key person policies are usually 5–10 year level term assurance, matched to a business plan or loan.
• Age, health and smoker status of the person insured – the dominant factors, exactly as with personal life cover.
• Critical illness or income protection add-ons – adding serious-illness cover typically multiplies the premium several times over, but illness is statistically the more likely event during working life.
• Occupation and lifestyle – hazardous pursuits and some occupations load the price.

Only buy from insurers authorised and regulated by the Financial Conduct Authority – you can check any firm on the FCA Register – and for anything beyond a simple case, a specialist business-protection broker will usually beat a direct quote.

Tax treatment: the Anderson principles

Whether the company can deduct the premiums against Corporation Tax follows HMRC's long-standing Anderson principles, set out in the Business Income Manual at BIM45525. Premiums are potentially deductible where all three tests are met:

• the sole purpose of the policy is to compensate the trade for loss of profits from the death or illness of the employee;
• it is short-term assurance (simple term cover, no investment or surrender value); and
• the insured is an employee without a significant shareholding – cover on a controlling shareholder-director usually fails this test because it partly protects the owners rather than the trade.

The mirror rule matters just as much: if premiums are deductible, a payout is normally taxable as a trading receipt – at 25% main-rate or 19% small-profits-rate Corporation Tax in 2026/27. Many businesses therefore gross up the sum assured so the after-tax proceeds match the need: to land £500,000 after 25% tax, insure £666,667. Treatment is decided case by case by your inspector, so ask your accountant to confirm the intended position in writing before relying on it. For the full premium-versus-payout arithmetic, use our dedicated Key Person Insurance Tax Calculator. If the person you are covering is a director whose family needs personal protection, a relevant life policy is the tax-efficient route for that separate job.

Worked example

An engineering company's technical director earns £70,000 and personally delivers work generating about £180,000 of annual gross profit. The board judges a replacement would take a year or more to find and get productive (the middle "hard to replace" setting), and the company carries a £100,000 bank loan the lender advanced largely on his involvement. The salary method gives a range of £350,000–£700,000 with a mid-point of £525,000 (7.5×). The profit method gives £360,000–£900,000 with a mid-point of £630,000 (3.5×). Taking the higher method and adding the loan, the suggested cover is £730,000 – which the board would sensibly round and, if premiums will be deductible so the payout is taxable, gross up for Corporation Tax before requesting quotes.

Common mistakes to avoid

• Insuring the salary, not the value. A founder on a deliberately low salary can be the most under-insured person in the building – use the profit-contribution method for owners and rainmakers.
• Ignoring the tax on the payout. If premiums were deducted, the proceeds are usually taxed as a trading receipt; a £500,000 policy may deliver only £375,000 of usable money at the 25% main rate.
• Using key person cover for shareholder problems. Buying out a deceased shareholder's family needs shareholder protection with a cross-option agreement, not a key person policy.
• Forgetting illness. Serious illness during working life is more likely than death; a death-only policy leaves the more probable risk uninsured.
• Setting and forgetting. Review the sum assured when profits, loans or the person's role change – a figure set at start-up can be badly wrong five years in.

Frequently asked questions

How much key person insurance should a business take out?

There is no statutory formula. UK insurers commonly accept cover of roughly 5 to 10 times the key person's annual remuneration, or 2 to 5 times the gross profit that person generates for the business. These are underwriting conventions, not guarantees – the right figure is the one you can justify to the insurer as the realistic cost of losing that person.

Who counts as a key person?

Anyone whose death or serious illness would cause measurable financial damage to the business: founders, managing directors, top salespeople, a technical lead holding critical know-how, or someone whose personal relationships secure your biggest contracts. The company takes out the policy, pays the premiums and receives any payout.

Are key person insurance premiums tax deductible?

Sometimes. Under HMRC's long-standing Anderson principles, premiums can qualify as a deductible trading expense when the policy's sole purpose is to protect trading profits, it is short-term term assurance, and the insured person does not hold a significant shareholding. If premiums are deductible, a payout is normally taxed as a trading receipt – so many businesses gross up the sum assured for Corporation Tax.

Is a key person insurance payout taxed?

Usually the tax treatment mirrors the premiums: where premiums were allowed as a trading expense, the proceeds are typically taxable as a trading receipt at the Corporation Tax rate (25% main rate, 19% small profits rate in 2026/27). Where premiums were not deductible – for example cover effectively protecting shareholders – proceeds may be received without a Corporation Tax charge. HMRC decides case by case, so get written confirmation of the intended treatment.

What does key person insurance typically cost?

Premiums depend on the sum assured, the person's age, health, smoker status, the policy term and whether critical illness cover is added. Costs vary so widely between a healthy 35-year-old and a 55-year-old smoker that any single figure would mislead – always compare quotes from FCA-regulated insurers or a specialist broker.

Is key person insurance a legal requirement in the UK?

No. It is entirely voluntary, but lenders and investors frequently require it as a condition of finance – a bank advancing a business loan may insist the loan amount is covered on the life of the founder for the loan term.

Can I insure a key person who owns most of the company?

You can, but the tax treatment changes. A significant shareholding usually fails the Anderson principles, so premiums are unlikely to be deductible; cover on shareholders is often better structured as shareholder protection with a cross-option agreement rather than simple key person cover.

Sources: premium deductibility and the Anderson principles from HMRC Business Income Manual BIM45525; Corporation Tax rates for 2026/27 from GOV.UK – Corporation Tax rates; insurer authorisation checks via the FCA Register. Cover multiples reflect common UK financial-underwriting conventions and are estimates, not advice.