Key Person Insurance

Key person insurance can also be known as key woman or key man insurance. It's set up as policy paid for by the business and covering the life of a person who plays a vital role to business continuity.

The business takes out the key person insurance policy, pays the premiums for insurance and receives any payouts, should there be a claim. It can be life cover only, or critical illness cover can also be added.

When considering key person insurance for an individual a business must consider what it would cost to replace that person. This includes salary, cost of recruitment, and training.

The term of the policy depends on how long the person is likely to be key to the business.

Any sum assured would be paid into the business or to the partners.

If certain criteria are met, the premiums of the policy are generally treated as allowable business expenses and so are tax deductible. The proceed of any payout will count as income to the business.

Key person insurance can be life cover, critical illness cover, or both.

For example, with a life insurance policy, if the key person is to die, a lump sum would be paid into the business. This would potentially cover the loss of income, or help the business replace the key person. Or, if the policy is to include critical illness cover, should the key person find themselves needing to recover from say a heart attack or cancer, the policy would pay out. The cover is taken out over a specific length of time - known as the term; and can normally be cancelled at any time.