Glossary · UK
What is Key Person Insurance?
A life or income protection policy taken out by a business on an employee whose loss would cause significant financial harm, with the company as beneficiary.
Full Definition
Key person insurance (also called key man insurance) is a life assurance or income protection insurance policy taken out by a business on the life or health of an employee or director whose death, illness, or incapacity would cause significant financial loss to the business. The business pays the premiums and is named as the policy beneficiary. On a valid claim, the payout goes directly to the company to fund: recruitment and training costs to replace the individual, lost profits during the transition period, repayment of business loans or personal guarantees, or general business continuity needs. The tax treatment of premiums and payouts depends on the policy's primary purpose. If the policy is wholly and exclusively for the purposes of the trade -- a revenue purpose, such as covering lost profits -- premiums are generally deductible as a business expense and payouts are taxable as trading income. If the policy has a capital purpose -- for example, to repay a capital loan or protect against a capital loss -- premiums are not deductible but the payout may be treated as capital. HMRC's guidance in the Business Income Manual (BIM45500 onwards) and ITTOIA 2005 s.87 cover this analysis. The purpose must be established at outset and should be documented in writing. Key person insurance is distinct from a relevant life policy: a relevant life policy is for the benefit of the employee's family and is held in trust, while key person insurance is for the company's own financial benefit. The sum insured should be reviewed regularly as the business grows and as the key person's role and remuneration changes.