Key Person Insurance, Keyman Cover and Tax Treatment

What is key person insurance?

Key person insurance is a term life or life and critical illness policy owned by a business on the life of an individual whose loss would cause it financial harm, paying a lump sum to the business on death or, where included, diagnosis of a specified critical illness. The business is the policyholder, pays the premiums and receives the benefit, and the insured person and their family receive nothing from it directly. It is also called keyman insurance or key person cover. In form it is life cover and, where it includes illness, critical illness cover, bought for a business purpose rather than for a family.

The business uses the payout to cover profit lost while it adjusts, to recruit and train a replacement, to repay loans that depended on the person, or to reassure lenders and customers. The amount is sized on the financial loss, and the person's salary is only one measure of it. The law sets the outer limit. A life policy needs an insurable interest: the Life Assurance Act 1774 makes a policy void where the person it benefits has no interest in the life insured (legislation.gov.uk: Life Assurance Act 1774, section 1), and no more can be recovered than the value of that interest. For a business, the interest is the money it would lose, so insurers ask for evidence of that loss and limit the sum assured to a figure the evidence justifies.

Who counts as a key person

A key person is anyone whose loss would cause the business financial harm: a founder who wins most of the work, a director whose personal guarantee backs the bank facility, a top salesperson, or a specialist the business cannot quickly replace. The test is the financial effect of losing them, whatever their seniority. Lenders read the same dependence when they assess a trading business: our commercial mortgage guide notes that dependence on a chef or other key person keeps restaurant underwriting cautious, and our page on equestrian land mortgages points to the key-person risk that riding schools carry.

How key person cover is regulated

Advising on and arranging key person cover is insurance distribution, which the Financial Conduct Authority regulates under its Insurance: Conduct of Business sourcebook, ICOBS (FCA Handbook: ICOBS 1.1), and not under the mortgage rules in MCOB. A long-term policy that pays only on death or incapacity, with no surrender value, is a pure protection contract in the FCA's terms (FCA Handbook: pure protection contract), one kind of protection insurance. Because the policyholder is a business rather than a consumer, the duty of fair presentation in the Insurance Act 2015 governs what it must tell the insurer, and the consumer disclosure rules do not apply (the checklist below explains both). The tax treatment of premiums and payouts depends on who is insured and why, and the business's accountant should settle it before the policy is set up.

Mortgage Lane works with limited companies, partnerships and LLPs on key person cover: owner-managed businesses, professional practices, property companies with lending secured on directors' guarantees, and growing businesses that depend on a few specialists. The cover often sits alongside the commercial mortgages and other business lending we arrange, including a property revolving credit facility, business bridging loans and property development finance. For professional practices, the dental practice mortgage and medical practice mortgage guides explain lending against practice premises. Our insurance pages cover the personal protection a director may want as well.

Key person insurance costs and premiums

Key person insurance premiums are set by each insurer from the key person's age, health, smoking status and occupation, the sum assured, the term, and whether critical illness cover is included. Insurers underwrite the person as for any life policy, assessing their health and lifestyle through medical underwriting, and also review the business's financial justification for the sum. This page quotes no premiums: the figure depends on the person, the cover chosen and each insurer's assessment.

The business also shapes the cost through the cover it chooses. Adding critical illness cover increases the premium, while a lower sum assured, a shorter term or life cover alone generally costs less. Each of those also pays less if a claim arises, so the useful comparison is the premium for a sum and term that match the loss. Whether the premiums are a deductible business expense, which changes their net cost to the business, depends on HMRC's conditions, set out in the tax section below.

Is your business dependent on one or two people? Get in touch with the business's accounts, its lending and the roles you rely on. Cover is sized on what the business would lose, not on salary alone.

Key person cover checklist

Every key person policy turns on the same decisions, and each insurer sets its own limits and evidence for them. The insurable interest and disclosure rows rest on statute, checked in October 2026. The other rows are the decisions the business makes: who to insure, for how much, for how long and on what terms. On the sum assured, insurers accept a figure justified by lost profit, replacement cost or loans, and each sets its own maximum for each method and the evidence it asks for, such as accounts.

Disclosure works differently from personal cover. The Consumer Insurance (Disclosure and Representations) Act 2012 applies only where an individual takes out insurance wholly or mainly for purposes unrelated to their trade, business or profession (legislation.gov.uk: Consumer Insurance (Disclosure and Representations) Act 2012, section 1), so it does not govern a policy a company or partnership buys. A business policyholder owes the insurer a fair presentation of the risk under the Insurance Act 2015: it discloses every material circumstance it knows or ought to know, or enough to put a prudent insurer on notice to ask more, and its material statements of fact must be substantially correct (legislation.gov.uk: Insurance Act 2015, section 3).

If the presentation falls short, the insurer's remedy depends on what it would have done with the full picture. Where the breach was deliberate or reckless, it can avoid the policy, refuse all claims and keep the premiums. Otherwise it can avoid the policy and return the premiums if it would not have offered cover at all, apply the terms it would have set, or pay a proportion of a claim if it would have charged more (legislation.gov.uk: Insurance Act 2015, Schedule 1). The key person also answers the insurer's health and lifestyle questions, and those answers need to be complete and accurate because the insurer sets its terms on them. Both Acts extend to England, Wales, Scotland and Northern Ireland, so the disclosure rules on this page do not change between the four nations; the tax section notes where Income Tax does.

Types of key person cover, and what each protects

Key person cover is shaped by the loss it protects against: lost profit, borrowing that depends on the person, a serious illness, or the cost of a replacement.

Profit protection

Profit protection covers the loss of profit while the business adjusts and recruits after losing a person who generates revenue or holds the relationships it depends on, such as a sales director whose clients deal with them personally or a founder whose name wins the work. It is sized on the person's share of gross profit over the time it would take to replace them, the method the sizing section below sets out. This is the purpose HMRC's guidance describes for deductible premiums: insurance whose sole purpose is to meet a loss of trading income that may result from losing the key person's services.

Get in touch with the person's role and the business's profit.

Key person loan protection

Loan protection covers business borrowing that depends on the person, through a director's personal guarantee or a lender's condition, so the business can repay the loan or reassure the lender if that person dies or, where covered, becomes seriously ill. Where a commercial mortgage, a revolving credit facility or a development loan rests on one or two directors, the sum is matched to the borrowing and the term to the loan. The lending side, including the guarantees lenders ask for, is on our commercial mortgages page. Cover sized to repay a loan may not meet HMRC's sole trade purpose condition, which is about meeting a loss of trading income. HMRC also does not allow premiums on endowment policies taken out as a condition of long-term finance as a cost of obtaining that finance, so the business checks the tax position with its accountant.

Get in touch with the facility terms.

Key person critical illness

Key person critical illness cover adds a payout on diagnosis of a specified critical illness. A serious illness during working life can remove a person from the business as completely as death, and a life-only policy would pay nothing while the business carried the loss. Each policy lists the conditions it covers and the severity a claim must meet, so the definitions need as much attention as the sum. HMRC's key person guidance covers critical illness as well as death, and treats premiums on critical illness or accident policies with an investment content as capital expenditure. Our page on critical illness cover when declined explains what happens when an insurer will not offer the cover on a person's health.

Get in touch with the person's health details.

Recruitment and replacement cover

Recruitment and replacement cover pays the cost of recruiting, training and paying a replacement, including the gap while the new person reaches full effectiveness. Recruitment fees, a period of overlap or interim cover, training and the lower output of a new starter all count towards the figure. It suits roles where the profit would largely continue once someone new is in post, so the loss is the cost of the change rather than months of lost revenue.

Get in touch with your recruitment costs.

How much key person cover a business needs

Insurers accept several methods of justifying the sum assured, and use the one that fits the person's role. Each method measures a different loss, and the aim is a figure that matches what the business would lose. A salary is the easiest number to find, and for a person who generates revenue it can sit well below the loss. The calculator on this page works out each method from figures you enter.

Salary multiple

Insurers use a multiple of the person's remuneration for roles where pay reflects value. It is quick to evidence from payroll or the accounts. For a director who takes part of their income as dividends, whether the dividends count as remuneration varies by insurer. Each insurer sets its own maximum multiple, and the 5 times used in the example on this page is an illustration, not an insurer's limit.

Profit contribution

This is the person's share of gross profit over the period needed to replace them, worked out as gross profit times the share the person generates times the replacement period in years. It suits salespeople, founders and fee earners whose work brings in the revenue. An insurer may ask how the share was worked out, for example from sales or billing records, alongside the accounts.

Replacement cost

Recruitment, training and overlap costs make up this figure: the fees to find a replacement, the cost of paying two people during a handover, and the time a new starter takes to reach full effectiveness.

Loans

Borrowing that depends on the person, such as a facility a lender agreed on the strength of a director's guarantee, sets the figure. The sum follows the outstanding balance and the term follows the loan.

Insurers set their own maximum multiples and require evidence such as accounts. Each insurer also decides whether it will cover lost profit and borrowing together, in one policy or two, and up to what combined limit. For a partnership or LLP the gross profit and the person's share come from the firm's accounts in the same way. Our page on partnership mortgages covers how lenders read a partner's profit share, and the page on limited company director mortgages explains how lenders treat a director's salary and dividends.

Key person insurance tax treatment

HMRC's guidance is that key person premiums are an allowable business expense where two conditions are met: the sole purpose of the insurance is the trade purpose of meeting a loss of trading income that may result from losing the key person's services, and, for life insurance, the policy is term insurance with no other benefits, for a term that does not run beyond the person's usefulness to the business (GOV.UK: HMRC Business Income Manual, BIM45525). Premiums on whole of life or endowment policies, or on critical illness or accident policies with an investment content, are capital expenditure and not deductible. Whether key person insurance is tax deductible therefore depends on the policy and its purpose. Where both conditions are met, HMRC treats the payout as income of the trade, under section 103 of the Corporation Tax Act 2009 for a company and section 106 of the Income Tax (Trading and Other Income) Act 2005 for an unincorporated business.

Shareholdings and the purpose test

Whether the sole purpose condition is met is a question of fact, decided on what the directors or proprietors were seeking to achieve by taking out the policy and paying the premiums. HMRC's guidance says there may be a non-trade purpose where a policy covers directors who are major shareholders but not other employees, or where the benefits go beyond the sick pay or other benefits usually given to employees of similar standing. Where a director's death would significantly affect the value of the company's shares, one purpose may be protecting the value of those shares, and so of the director's estate (GOV.UK: HMRC Business Income Manual, BIM45530). A significant shareholding is therefore one of the facts that can take the premiums outside the deduction, and the general test is whether the expense is wholly and exclusively for the trade (GOV.UK: HMRC Business Income Manual, wholly and exclusively).

When the payout is taxed

Where the policy meets HMRC's two conditions, the premiums are deductible and a key person payout is taxable as a trading receipt. Where it does not, as may be the case with cover for a major shareholder or a policy taken out to repay a loan, the premiums cannot be deducted and HMRC's general rule is that the payout is not taxed as trading income. HMRC adds that whether a particular receipt is trading income is a separate question of law, and that no assurance can be given that a future receipt will be excluded. A key person payout is therefore taxable in some cases and not in others, and HMRC looks at the facts of each case.

A company's taxable payout forms part of its profits for Corporation Tax. In a partnership, the partners share the profits and each pays tax on their share (GOV.UK: set up a business partnership), and an LLP carrying on a business with a view to profit is treated in the same way for Income Tax (legislation.gov.uk: Income Tax (Trading and Other Income) Act 2005, section 863). A taxable payout to a partnership or LLP therefore falls into the partners' or members' profit shares, taxed at their own rates, and those differ for a partner who pays Scottish Income Tax (GOV.UK: Income Tax in Scotland).

Mortgage Lane does not give tax advice. The business's accountant or a tax adviser confirms the treatment before inception, and a record of why the policy was taken out is the kind of evidence HMRC's guidance looks to when it tests the purpose.

Key person insurance, shareholder protection and relevant life policies

Key person insurance pays the business, while the other business protection policies pay the remaining owners or an employee's family, so each answers a different loss. Key person and shareholder protection can both be needed after the same death: the business loses profit, and the remaining owners need money to buy the deceased owner's shares from the estate.

Shareholder and partnership protection

Shareholder protection provides money for the remaining owners to buy a deceased or seriously ill owner's shares, usually under a cross-option agreement, so the shares can pass to the people running the business and the estate is paid in cash. Partnerships and LLPs use the same arrangement for a partner's share. HMRC's Inheritance Tax manual notes that agreements of this kind may be funded by life policies, and that a binding agreement under which the estate must sell and the survivors must buy can stop the shares qualifying for business relief, while an option to buy does not (GOV.UK: HMRC Inheritance Tax Manual, IHTM25292). A solicitor draws up the agreement, and the business's accountant confirms its tax effects.

Relevant life policies

A relevant life policy is a company-paid death-in-service benefit for an individual director or employee, paying a lump sum to their family through a trust. HMRC's guidance sets its shape: a lump sum payable on the person's death before an age no higher than 75, no surrender value, beneficiaries limited to individuals and charities, and tax avoidance not a main purpose. A payment from a relevant life policy is outside the tax charge on employer-financed retirement benefits schemes (GOV.UK: HMRC Employment Income Manual, EIM15045), and the premiums can be exempt from a benefit in kind charge under section 307 of the Income Tax (Earnings and Pensions) Act 2003, depending on the circumstances (GOV.UK: HMRC Employment Income Manual, EIM21800). Whether the company can deduct the premiums turns on the wholly and exclusively test, confirmed with its accountant. Because a relevant life policy pays the family, a business that wants cover for its own loss needs key person cover as well.

Executive income protection

Executive income protection pays a benefit to the business while a director or employee is unable to work through illness, and the business pays it on to the person through payroll, so it replaces salary rather than profit. For deferred periods and how a monthly benefit works, see our page on income protection insurance.

For a director's own family, personal cover sits alongside these policies. Family income benefit pays a monthly income to a family for the rest of a term, and our page on life insurance when declined deals with people an insurer has refused or postponed.

How key person cover is arranged

1. Dependence review. Who the business relies on, and how: the people whose loss would cost revenue, client relationships, borrowing or know-how, and the roles where someone could step in quickly.
2. Loss calculation. Profit, replacement and loan figures from the accounts, worked on each sizing method, with the evidence an insurer will ask for.
3. Tax check. Treatment confirmed with the accountant against HMRC's two conditions, with the purpose of the policy recorded.
4. Underwriting. The insured person's health and the business's financial justification, presented fairly to the insurer under the Insurance Act 2015.
5. Policy and review. Cover in force, owned by and payable to the business, and reviewed as the business grows, as loans are drawn or repaid and as the person's role changes.

A complaint about how the cover was sold, or how a claim was handled, goes first to the firm or insurer concerned. If it is not resolved, a business can refer it to the Financial Ombudsman Service if it is a micro-enterprise, with fewer than 10 employees and a turnover or balance sheet total of no more than €2 million, or a small business, with an annual turnover under £6.5 million and either fewer than 50 employees or a balance sheet total under £5 million (Financial Ombudsman Service: who we can help).

Sizing key person cover: the arithmetic

The example is an illustrative services company with £1.2 million of gross profit, whose sales director, paid £80,000 with no shareholding, generates about 30% of gross profit and would take about 18 months to replace fully. The key person insurance calculation below applies each sizing method to the same director, then shows what moves the result. All figures are hypothetical and match the starting figures of the calculator on this page.

Step 1. Three methods for a sales director

Each method answers a different question: what the director is paid, what the business would lose in gross profit while it replaces them, and what the replacement would cost. The salary multiple uses an illustrative 5 times; insurers set their own maximum multiples and require evidence. No borrowing depends on the director in this example.

The profit contribution method justifies the highest figure, £540,000, because it measures the gross profit the business would lose: 30% of £1,200,000 is £360,000 of gross profit a year, or £30,000 a month, for the 18 months it takes to replace the director. The salary multiple gives £400,000, which is £140,000 less, and replacement cost gives £80,000, enough for the recruiter and the handover but not for a year and a half of lost profit.

Step 2. How the replacement period changes the profit figure

The replacement period and the director's share of gross profit are both estimates, and the profit figure moves in step with each. On these figures every extra month adds £30,000. The table holds the share at 30% and changes the period.

Holding the period at 18 months instead, each 10 percentage points of share is worth £180,000: a 20% share gives £360,000 and a 40% share gives £720,000. Both estimates need support, such as the time past senior hires have taken and the sales or client records behind the share.

Step 3. Where borrowing depends on the director

Suppose, as a further illustration, that the company also had a £250,000 bank facility the director had personally guaranteed. The loan method then gives £250,000, a separate need from the lost profit, and cover for both would total £790,000. Whether an insurer would accept that total, in one policy or two, depends on its own limits. The loan cover would follow the facility's balance and term, and its tax treatment may differ from that of the profit cover, as the tax section explains.

What decides the case

Size the cover on the measured loss, not the salary, and review it as the person's role and the business change. Agree the tax treatment before inception. In this example, whether the premiums would be deductible and any payout taxable depends on HMRC's two conditions applied to the facts, including the purpose recorded when the policy is taken out, and the company's accountant confirms that before the sum is fixed. If a payout would be taxed, the amount left after tax is lower than the sum assured, and the business agrees with the accountant how to allow for that.