What to know about key person insurance
Thinking about key person insurance
What works well
- Cash reaches the business at the moment trading is disrupted.
- The sizing method can be documented and defended.
- HMRC’s conditions for deductibility are published and specific.
What to watch
- Investment-content policies are not deductible as an expense.
- A deduction on premiums usually means tax on the pay-out.
- Cover sized once and never reviewed drifts out of date fast.
Sizing the cover, and HMRC’s purpose test
A key person is anyone whose absence would visibly dent profit: a founder who holds the client relationships, a technical lead nobody can replace quickly, a sales director who writes most of the new business. Sizing the cover is an exercise in arithmetic, not sentiment — the usual approaches are a multiple of the person’s contribution to gross profit, the cost of recruiting and training a replacement including the months before they are productive, or the value of specific contracts that would be at risk. Whichever you use, write down the method and the figures so the sum assured can be justified later. The tax treatment is where businesses most often go wrong. HMRC’s guidance allows a deduction only where the sole purpose of the policy is the trade purpose of meeting a loss of trading income, and, for life cover, the policy is term insurance with no other benefits and a term that does not extend beyond the period of the employee’s usefulness to the company. Policies with an investment content — whole of life, endowment, or critical illness and accident cover that builds value — are capital expenditure and not deductible. And where premiums are allowable, the pay-out is generally taxed as trading income.
Agree the sizing method with your accountant, get the deductibility position confirmed in writing before the policy starts, and re-run the arithmetic whenever the person’s role in the business changes. Whatever the specifics of key person insurance, the discipline that protects the business is always the same: record who owns the policy, who receives the money and which agreement directs it; get the insurer’s and the accountant’s position in writing; and review the arrangement whenever the people, the shareholdings or the borrowing change.
Related guides
Looking at cover with PremierPMI
PremierPMI is a specialist private medical insurance broker and the publisher of The Health Guide. If you want to talk through what this means for your own cover, you can start there.
Or, if you would rather start here, send an enquiry and PremierPMI will contact you.
Common questions
What makes someone count as a key person rather than just a senior employee?
What are the usual methods for sizing key person cover?
Why does the type of life cover matter for whether premiums are deductible?
Sources and methodology
- [1] HM Revenue & Customs. “Business Income Manual BIM45525: key persons insurance”. View source(opens in a new tab)Primary source
We cite primary sources wherever possible. Read about our sourcing methodology.
Andrew Buscu
PMI Specialist & Copywriter, PremierPMI
- Whole-of-market private medical insurance adviser
- Claims and renewal specialist
Andrew is a member of the private medical insurance advisory team. He gathers detailed client requirements and liaises with insurers to arrange tailored quotes across the whole UK market, guiding clients from first quote through to claims and renewal. In one case he reduced a client renewal premium from £36,000 to £11,520 without reducing cover.
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Stuart Hendy
PMI Expert and Head of Publishing, PremierPMI
- 20 years in UK private medical insurance
- Underwriting and corporate placement specialist
Stuart brings over 20 years of experience advising on UK private medical insurance. He is a key member of the private medical insurance team and Head of the Publishing Team, gathering detailed client requirements, liaising with insurers on tailored quotes, and running training on insurer product changes and underwriting nuance.
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