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Key Person Cover
What is Key Person Cover?
Key Person Cover is a type of business life insurance that protects a company against the financial impact of losing a key employee, director, or business owner through death or critical illness.
The business takes out the policy on the life of the key individual — usually someone whose knowledge, skills, or leadership are essential to the company’s success. The company pays the premiums and is also the beneficiary of the policy.
If the insured person dies (or suffers a critical illness, if included), the policy pays out a lump sum to the company. This money can be used to:
- Offset loss of profits during recovery or recruitment.
- Repay business loans or overdrafts linked to the key person.
- Fund the recruitment or training of a replacement.
- Reassure investors, creditors, and clients that the business can remain stable.
Who counts as a “key person”?
A “key person” is anyone whose absence would cause significant disruption or financial loss — for example:
- A founder or director with strategic knowledge or client relationships.
- A top salesperson or specialist engineer.
- A partner or senior manager responsible for major contracts or revenue streams.
Tax treatment
Premiums and payouts are usually assessed based on HMRC’s “wholly and exclusively” rule:
- If the policy is designed purely to protect the company’s trading position (not for the individual’s personal benefit), premiums may be tax-deductible.
- The payout, however, is generally taxable as a trading receipt.
Because tax treatment can vary, companies often seek professional advice to ensure the policy is structured correctly.
Executive Income Protection
Executive Income Protection (EIP) is an employer-funded insurance policy designed to provide a regular income if a company director or key employee is unable to work due to illness or injury.
The business pays the premiums and owns the policy, but any benefit is paid to the company, which then continues to pay the employee’s salary (and possibly pension contributions) during their absence. This ensures financial stability for both the employee and the business.
How does it work?
If the insured person is unable to work because of sickness or injury, the policy pays a monthly benefit to the company after a waiting period (called the deferment period, often 4–26 weeks). The business then uses this money to maintain the employee’s income, up to a pre-agreed percentage (typically around 75% of gross earnings, including dividends and P11D benefits).
Cover can include:
- Income replacement for the director or employee.
- Employer pension contributions.
- National Insurance and other ongoing costs.
The policy continues paying until the insured person either returns to work, reaches the end of the benefit term, or retires — whichever comes first.
Tax treatment
- Premiums are usually treated as an allowable business expense if they meet the “wholly and exclusively for business purposes” test.
- The benefit is typically taxable as trading income to the company, but when passed to the employee as ongoing salary, it is then taxed under normal PAYE rules.
Because tax treatment depends on how the policy is structured, companies are advised to seek guidance from an accountant or tax specialist.
Who is it for?
Executive Income Protection is most suited to limited companies, particularly small and medium-sized enterprises (SMEs), that want to:
- Protect the income of key directors or employees.
- Maintain financial stability if illness or injury prevents someone from working.
- Provide an alternative to personal income protection in a tax-efficient and business-funded way.
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Submit the details of your insurance requirements here