Safeguard continuity: Keeps the business stable while you recover from losing a crucial individual.

Protect profits: Replaces lost revenue tied to a key person's expertise or relationships.

Maintain confidence: Reassures banks, investors and clients that the business can withstand a major loss.

Buy time: Gives you breathing room to recruit and rebuild without financial panic.

Key person insurance (also known as keyman insurance) is a life insurance or critical illness policy taken out by a business on the life of an individual whose skills, relationships, or expertise are essential to the company's success. Unlike personal life insurance, the policy is owned by the business, premiums are paid by the business, and in the event of a claim the payout goes directly to the company.

Any business has people whose loss would cause significant disruption: the founder who drives new business, the specialist whose technical knowledge is irreplaceable, or the director whose relationships underpin major contracts. Key person cover provides a cash injection to absorb that disruption: covering recruitment costs, lost profits, loan repayments or whatever the business needs most at that moment.

Key person policies can be structured to pay out on death, on diagnosis of a serious illness, or both. A life-only policy pays a lump sum if the key person dies or is given a terminal diagnosis during the policy term. Adding critical illness cover means the business also receives a payout if the key person is diagnosed with a qualifying condition (such as cancer, heart attack or stroke) and survives the stated survival period.

For many businesses the critical illness element is just as important as the life cover: a key person forced off work for months or years by serious illness can be just as damaging to the business as their death, and the payout allows the company to manage that impact without descending into financial difficulty.

The tax treatment of key person insurance depends on how the policy is structured and its purpose. Where cover is taken out to protect profit (for example to cover the loss of sales generated by a key individual) premiums are often an allowable business expense, though any claim proceeds would be taxable. Where the policy is used to protect a business loan, different rules typically apply. We always recommend discussing the tax position with your accountant, and our advisers can guide you through the structuring options to ensure your policy is set up correctly from the outset.

The following are illustrative examples only. They do not represent real clients or actual cases. Individual policy terms, eligibility and outcomes will vary.

The sum assured is typically calculated using one of three methods: a multiple of the key person's salary (commonly 3–5x), the cost of replacing the individual (recruitment, interim cover, training), or the estimated profit contribution. Baker Hudson Health will help you work through this calculation properly so your cover is proportionate to the actual risk.

Key person policies can be written on a level term or decreasing term basis, for life only or with critical illness cover added. The policy is owned by and paid for by the business; the payout goes directly to the business and can be used however necessary.