2 min read
What key-person insurance actually covers
A key-person policy is a life insurance or critical illness policy owned by the limited company, with the company as the beneficiary. If the insured individual dies or suffers a qualifying critical illness during the policy term, the insurer pays a lump sum directly to the company. The sum insured is typically set to reflect the financial impact of losing that person — lost revenue, recruitment and training costs, or loan repayment obligations.
Why commercial lenders take it seriously
In an owner-managed SME, one or two individuals often drive the majority of revenue, hold key client relationships, or possess specialist skills that cannot be quickly replaced. If that person is incapacitated, the business's ability to service debt can collapse overnight. Lenders therefore treat adequate key-person cover as a risk mitigation measure, particularly on unsecured or partially secured facilities. Some lenders require the policy to be assigned to them up to the outstanding loan balance, reverting any excess to the company.
Setting the sum insured
There is no universal formula, but common approaches include a multiple of the individual's contribution to gross profit, the outstanding value of loans they personally guaranteed, or the estimated cost of replacing their skills and client relationships. An insurance broker specialising in business protection can help you arrive at a defensible figure. Over-insuring is wasteful; under-insuring may leave the company exposed even with a policy in place.
Tax and accounting considerations
The tax treatment of premiums and benefits depends on the purpose of the policy and HMRC's published guidance, which has changed over time. As a general principle, premiums paid for a policy that protects revenue (rather than capital) may be deductible against corporation tax, and any benefit received may be taxable as trading income. The position is not straightforward — confirm the treatment with your accountant or tax adviser before taking out cover.
Frequently asked questions
Can a sole director of a limited company take out key-person cover?
Yes. A single-director company can insure itself against the loss of that director. The company takes out and owns the policy; the director is the life or lives insured. This is a common arrangement in micro-businesses seeking commercial finance.
Is key-person cover the same as relevant life insurance?
No. Relevant life insurance is a death-in-service benefit arranged by the employer for the employee's dependants — the benefit goes to the individual's family. Key-person cover pays the company. The two serve different purposes and are structured differently.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.