Key person insurance

Getting to grips with key person cover

Key person insurance is a business policy designed to protect a company if a crucial individual dies or becomes critically ill. That individual might be a founder, top salesperson, chief engineer, or anyone whose absence would seriously affect revenue, operations, or investor confidence. The pay-out usually goes to the business, helping to stabilise cash flow, fund recruitment, repay loans, or support shareholder arrangements. It is not a personal benefit for the insured person’s family unless the policy is structured that way.

In 2025, the UK insurance market is broadly buyer-friendly, with premiums falling across many lines and insurers offering broader terms. Motor is a notable exception where costs remain pressured, but most other areas have seen more competition and added flexibility. This environment can help well-prepared firms negotiate clearer wording, higher limits, and practical extensions. It also means good documentation and strong governance can translate into better outcomes on price and features.

Regulatory expectations have tightened around fair value and clear communications. Consumer Duty requires insurers and distributors to ensure products meet customer needs and deliver good outcomes. For you, that means simpler documentation, more transparent exclusions, and a stronger focus on vulnerability. At the same time, insurers face rising claims costs and fraud pressures, so underwriting still checks the numbers carefully. Your best route to value is to present clean financials, explain the person’s contribution in plain terms, and choose cover limits that match measured risks rather than guesswork.

Insurance can provide real financial resilience when it is set at the right level and understood in advance.

This guide walks you through what key person cover includes, where the limits are, what drives cost, and the smart questions to ask before you commit. No jargon, just steady, fact-based guidance to help you decide with confidence.

What is covered and how claims operate

Key person policies typically offer life cover, with the option to add critical illness for specified serious conditions. The benefit is a lump sum paid to the policyholder business if the insured person dies during the term. Where critical illness is added, a pay-out can occur on the diagnosis of a listed condition that meets the policy definition. Policy terms will set out exactly which conditions are included and the evidence required.

Cover is not designed to guarantee business continuity on its own. Rather, it buys time and breathing room. A life-only policy will not pay for illnesses that do not meet the definitions, and critical illness cover will not respond to conditions outside the list or those that do not meet severity thresholds. Most policies exclude self-inflicted harm and may have restrictions around pre-existing conditions, hazardous pursuits, or non-UK residency. If the key person leaves the business, cover usually ends unless formally reassigned or replaced.

Claims are generally straightforward: the insurer confirms identity, policy status, and the event, then releases the benefit to the business. Real-world examples include using funds to hire an interim executive, retain key clients through a transition period, repay a business loan tied to the individual, or implement a retention plan for the team. Payment times vary by claim type and documentation quality. Good preparation - current financials, medical disclosures, and clear role descriptions - helps keep the process smooth.

A precise definition of the person’s role and contribution is the single most important part of setting suitable cover.

Who benefits most from this cover

Key person insurance is particularly useful for SMEs and scale-ups where revenue or funding depends heavily on a few individuals. Owner-managed businesses, professional firms with a rainmaker partner, and venture-backed start-ups often rely on concentrated expertise or client trust that cannot be replaced quickly. Lenders and investors may require this cover as part of financing terms, especially when a person’s involvement underpins covenants or milestones.

It may be less essential for larger organisations with deep management benches and cross-training, where no single person represents a material single point of failure. Some micro-businesses with limited liabilities and modest turnover may prefer to build a cash buffer before taking out insurance. The key is to be honest about the commercial impact if that person were unavailable for an extended period and to set the sum insured with evidence rather than optimism.

Choosing levels of protection and add-ons

1. Basic life-only cover

   • Provides a lump sum if the key person dies during the policy term.
   • Most cost-effective option. Suitable where liquidity is the main objective and illness risk is managed elsewhere.

2. Life with critical illness

   • Adds a pay-out for specified serious conditions that meet policy definitions.
   • Higher premium than life-only but offers broader protection where illness would disrupt operations.

3. Life with critical illness and income replacement

   • Combines lump-sum protection with a short-term monthly benefit to support immediate cash flow.
   • Helpful for funding interim leadership or contractor costs while recruiting.

4. Decreasing vs level sum insured

   • Decreasing cover can align with reducing loans or milestones.
   • Level cover suits stable needs like client retention or investor confidence.

5. Optional features to consider

   • Guaranteed insurability options to increase cover after funding rounds or acquisitions without fresh medical underwriting.
   • Separation or conversion options if the person leaves, enabling policy reassignment.
   • Premium waivers if the key person is incapacitated.
   • Trust or business ownership structures for tax and governance clarity - seek professional tax advice.

6. Term length

   • Commonly 5 to 10 years, aligned to loan terms, product cycles, or investment horizons.

Keep options practical. Buy the features you can justify with numbers and governance, not just nice-to-haves.

Costs today and what shapes pricing

Insurer competition has improved across many UK lines in 2025, creating room to negotiate clearer wording and fair limits. However, inflation and fraud pressures still influence pricing and due diligence. Treat any online estimate as indicative only until underwriting is complete.

Can you apply and what will be checked

Most UK businesses can apply, including limited companies, LLPs, and some sole traders. Insurers typically require the key person to be a UK resident and actively working in the role. Applications usually include health questionnaires, potential medical exams at higher sums insured, and business documentation such as recent accounts, loan agreements, and an explanation of how the benefit has been calculated. Expect identity checks and anti-fraud screening.

Common reasons for decline include non-disclosure of medical information, sums insured that are not supported by financial evidence, roles that cannot be substantiated as key to the business, or adverse medical findings. If the person is not employed by the business or lacks an insurable interest, cover may not be available. Being open about health and finances from the outset is the best route to a clear, fair decision.

From quote to claim - simple steps

1. Define the key role, impact, and evidence-based sum insured.
2. Gather financials, loan terms, and role descriptions for underwriting.
3. Compare life-only vs critical illness options and term lengths.
4. Complete the application and health questionnaire accurately.
5. Attend any medical screening requested by the insurer.
6. Review the offer, exclusions, and ownership structure before acceptance.
7. Keep documents updated and understand the claims evidence required.

Keep a secure file with the policy schedule, ownership details, and claims contact.

The upsides and drawbacks you should weigh

Checks to complete before committing

Examine the policy schedule for sum insured, ownership, and pay-out recipient. Review exclusions, critical illness definitions, and any waiting periods carefully so you understand when cover will not respond. Confirm the policy term, renewal method, and how premiums may change at renewal. Note the excess or minimum claim evidence, and what documents your team must provide. If a lender or investor requires the policy, check that their interests are recorded correctly. Clarify tax treatment with a qualified adviser, as outcomes can vary by structure and purpose.

Alternatives and related protections

1. Shareholder or partnership protection
   • Provides funds for ownership buyouts if an owner dies or becomes critically ill. Better where equity continuity is the main concern.
2. Business loan protection
   • Aligns life cover directly to outstanding finance. Suitable when debt repayment is the priority.
3. Income protection for individuals
   • Replaces a portion of personal income for the insured, not the business. Useful for personal resilience.
4. Group life and critical illness schemes
   • Broader employee benefits may support retention and morale alongside key person cover.

Frequently asked questions

Q: How do I calculate the right sum insured? A: Start with measurable impacts: profit contribution, replacement and recruitment costs, and any debt or contractual obligations tied to the person. Use conservative assumptions and document your methodology.

Q: Is critical illness cover worth adding? A: It can be. Many disruptions stem from serious illness rather than death. Review listed conditions and definitions carefully, and weigh the higher premium against your exposure to prolonged absence.

Q: Will premiums fall further this year? A: Many insurance lines are competitive in 2025, but pricing still reflects age, health, and inflation. Focus on clear underwriting information and fit-for-purpose features rather than chasing the lowest sticker price.

Q: Who owns the policy and receives the pay-out? A: Usually the business owns the policy and receives the benefit. Some structures use a trust or assignment for tax or governance reasons. Seek professional advice on ownership and tax.

Q: What happens if the key person leaves? A: Cover typically ends unless you formally reassign or replace the insured person. Some policies include options to convert or continue. Check your terms before any handover.

Where to go from here

List your key roles, estimate the potential financial impact, and decide whether life-only or critical illness cover best fits your risk. Compare like-for-like quotes with consistent sums insured and terms. If you are unsure about tax or ownership, speak to a qualified adviser. You are in control and can take your time to choose with confidence.

Next step: gather your financials, role descriptions, and any lender requirements to speed up accurate quotes.

Important notice

This guide provides general information, not personal financial advice. Policy terms, tax treatment, and eligibility vary by insurer and your circumstances. Always read the full policy documents and seek regulated advice where appropriate before you buy.