What’s Covered by Key Person Insurance in the UK?

Key Person Insurance is a form of business protection that helps companies guard against the financial impact of losing a crucial employee. In the UK, this type of cover is especially important for small and medium-sized businesses that depend on a few individuals to drive success.

Typically, a key person is someone whose knowledge, skills, or leadership is vital to the company’s daily operations or long-term profitability. This can include directors, founders, or technical experts. If that individual becomes seriously ill or dies, the business could suffer major disruption.

The purpose of Key Person Insurance is to provide a financial cushion during this difficult time. The policy pays out a lump sum to help the business recover and keep running while adjustments are made or a replacement is found.

Many policies are highly flexible and can be tailored to the business’s needs. While the basic cover revolves around death or critical illness, the payout can be used in various ways to support the business and its employees.

What Triggers a Key Person Insurance Claim?

Before a policy pays out, a specific event must take place. These events are known as triggers and are clearly defined in the insurance agreement. In general, most policies cover death and serious illness, but the details can vary depending on the provider.

Death of the Key Person

This is the most common and straightforward claim scenario. If the named individual dies during the policy term, the insurer will release the agreed sum to the business. This money can then be used to manage disruption, hire a replacement, or cover lost income.

Some businesses take out life-only cover, while others opt for life and critical illness combined. The cost of the premium will vary based on this choice and the risk profile of the insured person.

Diagnosis of a Critical Illness

If the policy includes critical illness cover, it will pay out if the key person is diagnosed with a serious medical condition listed in the agreement. These typically include cancer, heart attacks, strokes, and major organ failure.

The individual does not have to die for the claim to be valid. As long as they are medically unable to work due to the condition, the claim can proceed. The diagnosis must usually be confirmed by a specialist and meet the policy’s specific criteria.

Terminal Illness

Some life insurance policies also include terminal illness benefit. This means the insurer will pay out early if the key person is diagnosed with a condition expected to lead to death within a certain period, often 12 months.

This early payout can give the business more time to plan and soften the financial blow. It also allows the insured person to be involved in transition planning before their departure.

Total Permanent Disability

In some policies, a claim may also be made if the key person becomes permanently disabled and is unable to work in any capacity again. This is not always included as standard, so it is worth checking the terms carefully.

Conditions like paralysis or severe brain injury could meet the definition for a valid claim. Insurers will often require ongoing medical reports before confirming eligibility.

How the Payout Can Be Used by the Business

Once a successful claim is made, the payout goes directly to the business. It is not taxed as income, although corporation tax relief may not apply in every situation. The company can then use the funds to deal with any disruption caused by the loss of the key person.

One common use is to recruit and train a replacement. This might include paying for recruitment services, temporary cover, or upskilling an internal candidate. These processes can take time and money, which the insurance helps to fund.

Another key use is to maintain business continuity. The payout can cover lost revenue if the key person was central to generating sales or managing operations. It may also help with retaining clients and contracts during the transition period.

Some businesses also use the payout to repay loans that depended on the key person’s involvement. For example, a start-up loan or investor agreement may include conditions tied to a founder’s active role. If they are no longer involved, the loan may need to be repaid early.

In rare cases, companies use the money to wind down or restructure if the individual was irreplaceable. Having that lump sum offers flexibility and breathing room to make informed decisions without panicking.

There are also softer but equally valuable ways to use the payout. For example, it can fund internal support initiatives, such as temporary bonuses, mental health resources, or incentives to retain staff morale. This can be especially helpful if the key person was a beloved leader whose absence affects team spirit.

In some industries, the payout may also be used to manage public relations or reassure investors. If the key person was the public face of the brand or heavily involved with key stakeholders, the business may need to invest in extra communication to maintain confidence.

What’s Not Covered by a Typical Policy

While Key Person Insurance offers valuable protection, there are limitations. Knowing what is not covered can help you set realistic expectations and avoid surprises during a claim.

First, most policies do not cover voluntary resignations or retirement. If the key person chooses to leave the business or steps down due to age, the policy will not pay out. This is because such events are considered manageable risks for any business.

Second, pre-existing conditions are often excluded. If the insured person had a known serious illness before the policy was taken out, claims related to that condition may be denied. Insurers usually require medical checks and questionnaires to assess this risk in advance.

Third, mental health conditions are sometimes excluded or only partially covered. While some providers are expanding support in this area, others still have strict criteria around claims based on stress, burnout, or depression.

Lastly, policies may not cover temporary absences. If the key person is off work for a short period, such as a few weeks due to illness or injury, the insurer is unlikely to pay. Most policies require the condition to cause long-term or permanent absence to qualify.

How Do I Choose the Right Key Person Insurance?

Choosing the right Key Person Insurance involves more than just comparing prices. You need to consider the unique needs of your business and the level of cover required to protect it fully.

Identify Your Key People

Start by listing the individuals whose loss would have the greatest impact on your business. This might include founders, technical leads, senior salespeople, or anyone who holds essential knowledge. Think about their contributions to revenue, operations, or strategy.

Some businesses have only one or two key people, while others may depend on several. Make sure you include everyone who would be difficult to replace or whose absence could cause financial strain.

Assess the Financial Risk

Work out how much money your business would need if a key person was lost. This could include lost sales, recruitment costs, debt repayments, and general cash flow support. A broker or accountant can help estimate this figure accurately.

It is better to slightly over-insure than to fall short and struggle during a crisis. However, keep in mind that higher payouts lead to higher premiums, so balance your needs with your budget.

Compare Providers and Policies

Not all Key Person Insurance is the same. Look at what each provider includes in their policy, especially when it comes to illness and disability cover. Some offer more flexibility or broader definitions of critical illness, while others have stricter terms.

You may also want to work with a specialist broker who understands business protection. They can recommend suitable options and help you avoid common pitfalls during the application process.