What makes someone count as a key person rather than just a senior employee?

A key person is identified by the effect of their absence on profit, not by job title. A founder holding the client relationships, a technical lead nobody else can replace quickly, or a sales director who writes most new business all qualify because losing them would visibly dent trading income. A senior employee whose work could be absorbed by colleagues without disruption does not automatically qualify, however impressive their title. The test is always the arithmetic of what would actually happen to profit if they left.

What are the usual methods for sizing key person cover?

There are three common approaches: a multiple of the person’s contribution to gross profit, the cost of recruiting and training a replacement including the unproductive months before they contribute fully, or the value of specific contracts that would be put at risk by their loss. There is no single correct method, so businesses should pick the one that best reflects their situation, write down the figures and the reasoning behind them, and be ready to justify the resulting sum assured if it is ever questioned later.

Why does the type of life cover matter for whether premiums are deductible?

HMRC’s purpose test only allows a deduction where the sole purpose is meeting a loss of trading income and, for life cover specifically, the policy is term insurance with no other benefits. Policies that carry an investment content — whole of life, endowment, or cover that builds value — are treated as capital expenditure rather than a trading expense, so the premiums are not deductible. This is why the policy type chosen at the outset, not just its purpose, decides the tax treatment.

Business and group protection

Key person insurance: how it works and how much cover to buy

The short answer

Key person insurance pays the business a sum if a named individual dies or, on some policies, suffers a defined critical illness. The company owns the policy and receives the money, using it to cover lost profit, recruitment and the disruption of replacing that person. HMRC applies a strict purpose test to whether premiums are deductible.

Written by Andrew Buscu. Reviewed by Stuart Hendy.

Published 15 September 2026. Last reviewed 15 September 2026. Next review due 15 December 2026.

What to know about key person insurance

A key person is anyone whose absence would visibly reduce profit. Read more
Cover is sized using a documented method, not a guessed figure. Read more
HMRC allows a premium deduction only where the sole purpose is meeting a loss of trading income. Read more
Investment-content policies count as capital expenditure and are not deductible. Read more

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

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Common questions

What makes someone count as a key person rather than just a senior employee?: A key person is identified by the effect of their absence on profit, not by job title. A founder holding the client relationships, a technical lead nobody else can replace quickly, or a sales director who writes most new business all qualify because losing them would visibly dent trading income. A senior employee whose work could be absorbed by colleagues without disruption does not automatically qualify, however impressive their title. The test is always the arithmetic of what would actually happen to profit if they left.
What are the usual methods for sizing key person cover?: There are three common approaches: a multiple of the person’s contribution to gross profit, the cost of recruiting and training a replacement including the unproductive months before they contribute fully, or the value of specific contracts that would be put at risk by their loss. There is no single correct method, so businesses should pick the one that best reflects their situation, write down the figures and the reasoning behind them, and be ready to justify the resulting sum assured if it is ever questioned later.
Why does the type of life cover matter for whether premiums are deductible?: HMRC’s purpose test only allows a deduction where the sole purpose is meeting a loss of trading income and, for life cover specifically, the policy is term insurance with no other benefits. Policies that carry an investment content — whole of life, endowment, or cover that builds value — are treated as capital expenditure rather than a trading expense, so the premiums are not deductible. This is why the policy type chosen at the outset, not just its purpose, decides the tax treatment.^[1]

Sources

HM Revenue & Customs. Business Income Manual BIM45525: key persons insurance. Accessed 15 September 2026 (primary source)