Key Person Cover

Key person cover suits limited companies, partnerships and LLPs where the loss of one person would hit profits, customers or the ability to repay borrowing. It is often worth considering when:

• One or two people bring in most of the work or revenue.
• Someone holds specialist skills, qualifications or relationships that would be hard to replace quickly.
• The business has loans or investors who would be concerned if that person were lost.
• A director has given personal guarantees on business borrowing.

Who counts as a key person? Anyone whose absence would cause real financial harm: a founder, a sales director, a technical lead or a senior adviser. They don't need to own shares in the business.

1. The business takes out the policy. It owns the policy, pays the premiums and receives any payout.
2. It insures the key person's life, and usually serious illness too, for an agreed amount and term.
3. If that person dies or is diagnosed with a covered illness during the term, the insurer pays the lump sum to the business.
4. The business decides how to use it, for example to cover lost profit, recruit and train a replacement, reassure lenders and suppliers, or repay debts.

Some insurers also offer key person income protection, which pays the business a monthly amount while the person is off work through illness, rather than a single lump sum.

How much cover. There is no single formula. Insurers will usually accept an amount based on one of these, within their own limits:

• A multiple of the person's salary and benefits.
• A multiple of the profit they help generate.
• The cost of recruiting, training and covering for a replacement.
• The amount of business debt that would need repaying.

We work out a figure that reflects the real impact on your business and that the insurer will accept.

What it costs. The price depends mainly on the key person's age, health and smoking status, the amount of cover, the length of the policy, and whether serious illness is included. Because the business pays, the cost is usually modest compared with the risk it protects.

Tax. How premiums and payouts are treated for tax depends on how the policy is set up and the business's circumstances. In some cases premiums can be treated as a business expense, and the payout is then taxed as business income. We'll explain the options, and your accountant should confirm the treatment for your business.

Being clear about the limits helps you choose the right mix of cover:

• It doesn't buy a departing owner's shares. If you need the remaining owners to be able to buy out a shareholder or partner, that's shareholder and partner protection.
• It pays the business, not the person's family. Their own family needs personal life insurance or relevant life cover.
• Serious illness cover only pays for the conditions defined in the policy. We'll explain exactly what is and isn't included before you decide.
• It doesn't automatically clear business loans. It can be used for that, but loan protection is designed specifically for it.