Running a successful business often depends on the expertise and dedication of a few key individuals. Whether it’s a founder, a managing director, or a senior employee with specialist knowledge, losing that person unexpectedly can cause significant disruption or loss of Earnings. Key person insurance exists to protect your business from the financial impact of such an event.
What is Key Person Insurance
Key person insurance is a type of life and critical illness cover taken out by a business on a crucial employee. If that individual were to pass away or become critically ill, the policy pays out a lump sum to the business. This pay-out can help cover losses, protect profits, or provide the financial buffer needed to recruit and train a replacement.
Key Benefits of Key Person Cover:
- Business continuity – Ensures the company can continue trading during a difficult transition.
- Financial stability – Provides a cash injection to offset lost revenue or repay loans linked to the individual.
- Confidence for stakeholders – Reassures lenders, investors, and clients that the business has protection in place.
- Recruitment costs – Helps fund the search and onboarding of a suitable replacement.
Real Life Example:
Mark Thompson is the Managing Director of a Midlands-based manufacturing company, employing around 60 staff. The business has built a strong reputation in the automotive supply chain, and recent years have seen sales revenues increase steadily. Much of this success is down to the tireless enthusiasm of Paul Edwards, the Sales Director.
Paul’s skills and energy have secured contracts that competitors twice the company’s size failed to win. In fact, his most recent pitch landed a deal that would have guaranteed the company’s expansion for the next five years. Mark was confident that, with recently agreed finance from the bank, the business could look forward to a profitable and secure future.
Then everything changed. Mark was greeted with the tragic news that Paul had been killed in a traffic accident. After the initial shock, his first thoughts were with Paul’s family, how must they be feeling? Would they be okay financially?
But as the dust began to settle, Mark’s attention turned to the future of his business. Without Paul’s drive and personal relationships, would those hard-won contracts remain secure? To many clients, Paul was the face of the company. Would his death mean a loss of confidence, falling sales, and missed opportunities? What if the bank, unnerved by the sudden uncertainty, decided to call in the loan that had been so carefully negotiated?
Paul wasn’t just an employee, he was a key person. Mark was forced to confront the reality that Paul’s death could also mean the death of the business he had worked so hard to build.
The tragic irony is clear. Mark could replace Paul’s company car because it was insured — but he hadn’t thought to insure Paul himself. If only he had insured the driver as well as the car.
A cash injection from a key person life insurance policy could have replaced lost revenue, reassured the bank, paid off loans, and funded the recruitment of a replacement. Most importantly, it could have bought the company time — the breathing space needed to adapt, reassure clients, and protect the livelihoods of its 60 employees.
This example shows why key person insurance isn’t just about financial protection. It’s about safeguarding the future of a business, its people, and the families who rely on it.
Tax Treatment of Key Person Insurance
For companies and limited liability partnerships, if certain criteria are met the tax treatment of a key person policy should be that:
- You can treat the premiums you pay as allowable business expenses, deductible from your company profits. This means you could reduce your Corporation Tax liability every year you have the policy.
- However, you’ll have to account for any proceeds from the policy as a trading receipt, potentially increasing your Corporation Tax liability in the year of receipt.
- If the criteria are not met, then premiums are not normally deductible for corporation tax purposes. Likewise, the proceeds for any claim would not be taxed as trading income.
Get in touch
If you are a business owner and want to explore your options for life protection through your business, please get in touch to discuss your business needs with a financial planner who understands small business challenges.
Our initial consultations come with no obligation, these consultations will allow us to explore your Business protection requirements but we can also cover other financial planning for business owners such as: planning for retirement, or preparing to sell your business.
Castle Rock Financial Planning offers expert guidance tailored to directors, shareholders, and owner-managed firms.
Castle Rock Financial Planning
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Castle Rock FP Team
