How to Set Up Key Person Insurance the Right Way

Key Person Insurance is a type of business cover that helps protect your company if an important person in the business becomes seriously ill or dies. This person might be a founder, director, or someone whose skills or knowledge are essential for running the company.

If something happened to this key person, it could have a major impact on your income or even cause the business to stop trading. Key Person Insurance is meant to reduce that risk by offering a safety net that helps the business keep going while changes are made.

This guide will walk you through how to set up this type of insurance in the correct way, so your business stays protected and you can focus on growing without worrying about unexpected changes.

Decide Who Needs to Be Covered and Why

Choosing the right people to cover under Key Person Insurance is one of the most important steps. These are individuals whose absence would cause financial difficulty for your business. Start by looking at the team and thinking about who the business depends on the most.

Identify Critical Roles

Start by listing who plays a key part in keeping the business running. This could be someone who manages the finances, brings in new customers, or owns technical skills that no one else has.

Think about what would happen if they were suddenly not available. Would it stop sales? Delay major projects? Affect staff performance? If the answer is yes, they may need to be covered with a good insurance policy.

Consider Revenue Generators

Some people in a business are directly responsible for bringing in money. This might be your sales manager or the founder with long-standing client relationships. If their work stopped, income might drop fast.

Covering them means the business can recover some of that lost income while making new plans. It also gives time to train someone new or hire a replacement without rushing into a poor decision.

Include Financial Decision Makers

People who manage budgets, banking, and major deals also need to be looked at. If your finance director or managing director plays a role in how money is spent or invested, their loss could hurt the business financially.

Insurance for these people can keep money matters in order while the business adjusts. You can use the payout to hire expert help or continue projects without delays.

Check for Specialist Knowledge

In some industries, certain skills are rare and hard to replace quickly. If someone has expert knowledge of systems, software, or techniques, covering them with insurance can stop projects from falling apart if they are gone.

Without these people, the company might lose valuable time or fail to meet client demands. Protecting their role helps keep things running smoothly.

Work Out the Right Level of Cover

Once you know who needs to be insured, the next step is choosing how much cover your business should have. This is called the sum insured and it should reflect the value that person brings to your company. Getting this right means your business will have enough support if a claim is needed.

You might base it on the person's salary, how much profit they help generate, or how much it would cost to replace them and recover from the impact of losing them. A common figure is between one to five times their annual salary or the same amount as lost profits over a year.

Some businesses ask an accountant to help estimate these values. It is worth getting this part right so the insurance pays out enough to really help if the worst happens. Going too low might leave you short, while going too high could make the policy cost more than needed.

Review this amount regularly. If your business grows, or if the key person's role changes, your cover might need updating to stay useful.

What You’ll Need to Apply for a Policy

Applying for Key Person Insurance is usually simple, but you will need to provide some information. This helps the insurer decide how much the policy will cost and if they need to ask any extra questions. It also makes sure the policy is set up correctly.

First, you will be asked for details about the key person. This includes their age, job title, and how long they have worked at the company. You will also need to share what they do in their role and why they are important.

The insurer might ask for health details or a short medical check. This is common when applying for any type of life or health insurance. The person applying will have to give consent before this takes place.

Finally, the insurer will want to know about your business. They will ask what type of work you do, how big your team is, and how much money the business makes each year. This helps them understand the level of risk.

Make sure all the information is correct. Wrong details can lead to problems if you ever need to make a claim. If you are unsure, ask your insurance adviser for help.

Key Things to Get Right from the Start

Setting up Key Person Insurance takes careful thought. To get the best results, there are a few things you should make sure are done properly from the beginning.

Choose the Right Policy Type

There are different types of Key Person Insurance depending on what you need. Some pay a lump sum if the person dies. Others offer cover for critical illness. Some include both. Be clear about what you want the policy to do and ask questions if you are not sure.

You may also want to decide if the cover should protect profits, help repay loans, or cover the cost of finding a replacement. These are all good reasons to take out a policy, but they may need slightly different setups.

Set Up the Right Owner of the Policy

Usually, the business owns the policy and pays the premiums. This means if a claim is made, the money is paid to the business, not the person or their family. This setup makes it easier for the company to use the funds to recover and carry on trading.

Double-check who the policy is written under and who will receive the money. Mistakes here can cause delays or tax problems. If needed, ask a financial adviser to review your setup and explain the best way to handle ownership and payouts.

Keep It Under Review

Businesses change over time, and so do the people inside them. Make sure you review your Key Person Insurance at least once a year. If someone takes on a bigger role, their cover may need to be updated. If they leave the business, the policy may no longer be needed.

It is better to stay ahead than find out too late that your insurance is out of date or too low to help. Plan a yearly review as part of your business check-up process.

Talk to your insurer or adviser regularly to make sure your policy keeps up with your needs. They can help you adjust the cover and answer any new questions as your business grows and changes.