Keyman insurance, more often written now as key person cover, is a policy a business takes out on somebody whose loss would damage the business itself. The company arranges it, the company pays for it and the company receives the money. That ownership structure is the whole product, and it is what distinguishes it from a personal life policy.
What it is for
Some businesses are genuinely concentrated in one or two people: the founder who holds the client relationships, the developer who wrote the system nobody else understands, the salesperson producing most of the revenue. If that person dies or becomes critically ill, the business faces a measurable loss of profit and a real cost in recruiting and replacing them, often while a lender or an investor becomes nervous at the same time. Key person cover pays a sum to the business to absorb that period, rather than paying anything to the individual or their family.
Who owns it and who benefits
The company is the policyholder and the beneficiary; the key person is the life assured. That is the arrangement that makes it business cover rather than personal protection, and it needs the individual's consent and usually some medical underwriting. It sits alongside two related arrangements that are frequently confused with it: shareholder protection, which funds the purchase of a deceased shareholder's stake so it does not pass outside the business, and relevant life cover, which is a death in service benefit paid to the employee's family. The three answer different questions and are often needed together.
Setting the sum assured
There is no formula an insurer imposes, but underwriters do expect the figure to be justifiable rather than plucked from the air. The common approaches are a multiple of the person's contribution to gross profit, the cost of recruiting and bedding in a replacement, or the amount of any loan or overdraft personally tied to them. A lender requiring the cover as a condition of facility will often set the figure itself, and in that case the policy is effectively collateral rather than general protection.
The tax question, which is not automatic
The treatment of premiums and proceeds is not uniform and depends on the purpose of the policy and the relationship of the person to the business. Broadly, cover taken purely to protect trading profits for a short term employee has a different treatment from cover taken to protect a capital loss or to secure a loan, and the position for a shareholding director is different again. This is one of the genuinely common areas where a business should take its own accounting advice rather than rely on a general description, because the answer turns on facts specific to the arrangement.
Questions people ask about keyman insurance
Is keyman insurance the same as life insurance?
It uses similar underwriting but the ownership is different. The business owns the policy and receives the payout, and the money is there to protect the business rather than the individual's family. A personal life policy pays the estate or the named beneficiaries.
Can a sole trader take out key person cover?
The structure fits a company better, because the company can be the policyholder and beneficiary. A sole trader is not separate from the business in law, so the arrangement is usually personal protection written for a business purpose instead.
Is it tax deductible?
Sometimes, and it depends on the purpose of the cover and the status of the person insured. Cover for a short term trading loss on an ordinary employee is treated differently from cover securing a loan or protecting a capital asset. It is worth confirming the position with your accountant before assuming either answer.
Does it cover somebody simply leaving?
No. Key person policies are written around death and, where the critical illness option is added, serious illness. Resignation, retirement and a move to a competitor are commercial risks handled by contracts rather than by insurance.