Key Person Protection

What would losing your key person cost the business?

Key person protection, often called key man insurance, pays your business a lump sum if someone it relies on dies or becomes critically ill.

Most small businesses depend on one or two people for sales, client relationships, technical know-how or leadership. If one of them is suddenly gone, the business still has wages, suppliers and loans to pay while it adjusts.

Free, with no obligation. You deal with Des directly.

At a glance

Who owns it

The business

Who it covers

A director or employee the business relies on

What it pays

A lump sum to the business on death or, if chosen, diagnosis of a specified critical illness

What it's for

Lost profit, recruitment, steadying cash flow and reassuring lenders

Authorised and regulated by the Financial Conduct Authority. FCA No. 1034779

Your business may depend on one person more than you think

Ask yourself a simple question: who could the business not easily replace next month?

It's often the founder, the person who brings in most of the sales, or the specialist whose knowledge isn't written down anywhere. Losing them through death or serious illness is a personal shock first. For the business, it's also a financial one: income can fall at the same time as costs rise.

The question isn't whether the business would survive in the long run. It's whether it has the cash to get there.

Key people are often

  • The founder or managing director
  • A sales director who holds key client relationships
  • A technical specialist or engineer
  • An operations or finance lead
  • A partner who brings in the work
  • The person whose name is on the borrowing

If the answer to "who couldn't we replace quickly?" comes to mind straight away, that's usually your key person.

What can happen if nothing is in place

The loss of a key person rarely causes just one problem. These tend to arrive together.

  • Sales and profit fallClients, contracts and the pipeline can stall when the person who managed them is no longer there.
  • Recruitment costs and delaysFinding and training a replacement can take months, and senior hires rarely come cheap.
  • Pressure from lendersA bank may review its facilities, particularly if the key person was a director or guarantor.
  • Cash flow strainWages, rent and suppliers still need paying while income drops.
  • Staff and client confidenceUncertainty can unsettle the team and give competitors an opening.
  • Plans put on holdGrowth, investment or a planned sale may have to wait, or may not happen at all.

How key person protection helps

The business takes out a policy on the life of the person it relies on. If they die, or are diagnosed with a covered critical illness, the insurer pays the business a lump sum.

  1. We identify who matters most

    We look at who drives profit, holds key relationships or is tied to the borrowing.

  2. We put a figure on the risk

    Common approaches look at the person's contribution to profit, the cost of replacing them and any debts that depend on them. Insurers apply their own limits.

  3. The business owns the policy

    The company takes out and pays for the policy, and it is the beneficiary.

  4. A claim pays the business

    The money can be used where it's needed most: replacing lost profit, recruiting, repaying debt or keeping staff and suppliers paid.

  5. We review it as the business changes

    Cover that made sense three years ago may not match the business today.

Who key person protection is suitable for

It's worth considering if any of these sound like your business.

  • Limited companies and LLPs that rely on a director or senior employee
  • Businesses where one person generates a large share of the sales
  • Companies with borrowing that depends on a particular person
  • Owners preparing to grow, take on investment or sell
  • Businesses with specialist skills that would be hard to replace
  • Sole traders and partnerships with an essential employee (the structure is different)

When it may not be the right answer

Key person protection looks after the business, not the individual's family, and it doesn't decide who owns the shares if an owner dies. If those are your concerns, a relevant life plan or shareholder protection may be more appropriate. Many businesses need more than one type of cover.

Practical examples

These examples are illustrative only. The businesses and people are fictional, not clients, and any outcome would depend on underwriting, the policy terms and a valid claim.

  • Illustrative example · Engineering firm

    The specialist no one else could replace

    A precision engineering company relies on its technical director for complex quotes and its largest customer relationship.

    If he died: the company could face months of lost orders while it found and trained a replacement.

    With cover: a lump sum paid to the company could help fund recruitment and support cash flow during the handover.

  • Illustrative example · Marketing agency

    The founder who wins the work

    Most of the agency's new clients come through the founder's personal network.

    If she became critically ill: new business could dry up while the team kept existing clients going.

    With critical illness cover included: a payout could help keep staff paid while others step up and build new relationships.

  • Illustrative example · Building contractor

    A loan that relies on one director

    The company has a commercial loan, and the lender places weight on the managing director's involvement.

    If he died: the lender might review the facility at the worst possible time.

    With cover: the payout could help the company reduce or repay the loan and keep trading.

Common questions

Is key man insurance the same as key person protection?

Yes. They're two names for the same thing. Key person is the more modern term, because the person a business relies on can be anyone.

How much cover does a business need?

There's no single formula. Common approaches look at the person's contribution to profit, the cost of recruiting and training a replacement, and any loans that depend on them. Insurers apply their own limits, and I'll explain how I've arrived at any figure I recommend.

Who pays the premiums and who receives the money?

The business pays the premiums and owns the policy. If there's a valid claim, the money is paid to the business.

Are the premiums tax deductible?

Sometimes. Whether premiums can be treated as an allowable business expense depends on the circumstances, including who is insured and why. Where premiums are allowed, the payout is normally taxed as a business receipt. Your accountant should confirm the treatment for your company. Read more about how key person insurance is taxed.

Can critical illness cover be included?

Yes. Many policies can pay out on diagnosis of a specified critical illness as well as on death. The conditions covered and their definitions vary between insurers, which is one reason advice matters.

What happens if the key person leaves?

The policy can usually be cancelled. Most key person policies are term policies with no cash value, so nothing is paid back. Depending on the insurer, it may be possible to change the person covered or transfer ownership.

Will the person need a medical?

Not always. It depends on their age, health and the amount of cover. The insurer may ask for a GP report or a medical examination, particularly for larger amounts.

Key person protection pays out only on a valid claim and has no cash value. Critical illness definitions vary between insurers. Tax treatment depends on individual circumstances and may change.

Find out where your business stands

The Business Resilience Health Check takes a few minutes and shows which risks apply to your business. Or book a conversation: I meet business owners in Birmingham and the West Midlands in person, and advise across the UK by phone and video call.

Or call me on 0121 663 0171