Calculate the right level of key person insurance cover for your UK business. Estimate revenue protection, loan cover, and replacement cost.
Key person insurance (also called key man insurance) is a life assurance or critical illness policy taken out by a business on the life of a key employee whose absence would significantly damage the company's profitability. If the key person dies or suffers a critical illness, the policy pays the business a lump sum to cover lost profits, recruitment costs, and loan repayments.
Whether premiums are tax deductible depends on the purpose of the policy. If the policy is taken out to protect revenue (trading) losses, premiums may be tax deductible as a business expense, but the payout will be taxable income. If it is to protect a capital asset (e.g., a major shareholder), premiums are not deductible, but the payout is also not taxable. Always seek specialist advice.
A common rule of thumb is 5–10× the key person's annual salary, or the multiple of gross profit they generate multiplied by the recovery period. Our calculator uses a more detailed formula: (Revenue × Gross Profit % × Recovery Years) + Replacement Costs + Guaranteed Loans, which gives a more accurate figure based on your specific circumstances.
Many key person policies include a critical illness option that pays out if the key person suffers a specified serious illness (such as cancer, stroke, or heart attack) rather than waiting for death. Critical illness cover typically costs more but means the business receives funds while the key person may still survive and recover.
The business owns the key person insurance policy and pays the premiums. This is different from personal life insurance, where the individual is both the policy owner and the life assured. Because the business owns the policy, the proceeds are paid to the business, not to the employee's family (unlike a Relevant Life Policy).