Introduction
Key person insurance is one of the most straightforward business protection products in principle — but in practice, structuring it correctly requires a clear understanding of how insurers assess the risk, what evidence they need to price it, and how the policy interacts with the company's legal and tax structure.
This guide goes beyond the basics covered in our keyman insurance overview. It is intended for business owners, company directors, and their advisers who are actively considering putting cover in place and need to understand the process from initial assessment through to annual review.
How Insurers Assess Key Person Risk
The underwriting process
Key person insurance involves two separate underwriting assessments: the medical underwriting of the individual being insured, and the business underwriting of the risk being covered.
Medical underwriting follows the same process as any individual life or critical illness policy. The insured individual completes a personal health declaration, disclosing their medical history, current health, lifestyle factors (smoking, alcohol, weight, family history), and occupation. For large sums assured — typically above £1–2 million for life cover, or above £500,000 for critical illness — a full medical examination and blood tests may be required.
Business underwriting is the assessment of the commercial basis for the cover. The insurer's underwriting team will want to satisfy themselves that:
- The sum assured is proportionate to the actual financial loss the business would suffer
- The key person's contribution to profits or revenue can be evidenced
- There is a genuine insurable interest — the business has a real financial exposure, not a notional one
- The policy term and sum assured are consistent with the purpose stated at application
What evidence insurers typically require
For most key person applications, insurers will ask for:
- Audited accounts for the last 2–3 years (or management accounts if the business is less than 3 years old)
- A profit attribution analysis: how much of the company's annual gross profit or revenue can be attributed to the key person's direct efforts, client relationships, or specialist skills
- Details of any personal guarantees the key person has given for business loans, overdrafts, or credit facilities
- A description of the key person's role and why the business would struggle to replace them quickly or cheaply
- The anticipated cost of replacement: including recruitment fees, relocation packages, and the productivity shortfall during a transition period
For very large sums assured (above £5 million), insurers may require a formal independent business valuation or an accountant's letter confirming the profit attribution methodology.
Revenue Loss vs Capital Loss Policies
Key person insurance is designed to indemnify one of two types of financial loss:
Revenue loss
The most common form. The policy is designed to replace the ongoing trading income — the gross profit or revenue — that the business would lose during the period needed to recruit and train a replacement.
The sum assured is calculated as a multiple of the key person's annual profit contribution, typically 3–5 years' worth. The logic is that the business will need up to 5 years to fully recover the lost revenue stream — whether through recruitment, business development, or organic recovery.
What insurers look for: documented evidence that the stated profit contribution is genuine. If a managing director claims their personal contribution to profit is £500,000 per annum, the insurer will want to see accounts that support this. Where the business's total profit is only £600,000, a claim that one individual contributes £500,000 requires a very clear explanation.
Capital loss
Less common. The policy is designed to compensate for the reduction in the capital value of the business caused by the key person's departure — relevant where their presence is integral to the business's value as a going concern.
For example: a professional practice where the founding partner holds all the client relationships, or a technology company where a single developer holds the IP and all product knowledge. The departure of that individual does not merely reduce annual profits — it materially reduces the business's saleable value.
Capital loss policies are harder to underwrite because the loss is harder to quantify with certainty. Insurers will typically require a formal business valuation.
Combined policies
Where both types of loss are relevant, a combined policy may be structured — for example, covering both the revenue loss during the replacement period and the capital loss reflected in a reduced business value. These require careful structuring and clear documentation of the basis for each element of the sum assured.
Structuring the Policy in a Limited Company
Ownership and policy structure
The company — not the individual — is the policyholder, premium payer, and beneficiary.
The policy is arranged in the company's name. Premiums are paid by the company from its bank account. In the event of a claim, the payout goes directly to the company.
The policy should not be written in trust. Trusts are used for personal life policies to ensure the payout goes to family beneficiaries outside the estate. For a key person policy, the intended beneficiary is the company itself — there is no need for a trust wrapper.
The policy asset on the balance sheet
A key person policy — like any company-owned insurance policy — is a company asset. It should appear on the balance sheet as a prepaid asset (for the portion of the premium relating to future periods), though accounting treatment varies.
The insurer's surrender value (if any — most term policies have no surrender value) represents the recoverable amount. For whole-of-life key person policies (less common), there may be a surrender value that grows over time.
Tax treatment: the HMRC tests
HMRC guidance (Business Income Manual BIM45525–BIM45530) sets out the conditions under which key person insurance premiums are treated as a deductible business expense:
- Short-term policy: the policy must be a term policy with a fixed end date. A whole-of-life policy or any policy with a surrender value is treated as capital, not revenue.
- Employee relationship: the cover must relate to an employee, not a sole trader or partner (who would claim differently). For a director who is also a major shareholder — a "proprietary director" — HMRC takes the view that their departure affects the capital value of the business, not just its revenue, and may disallow the deduction.
- No surrender value: a policy with a surrender value is a capital asset, and premiums are not deductible on revenue account.
- Purpose is to replace income: the cover must be justified by reference to revenue loss, not to protect capital or fund a share purchase.
Where the conditions are met and premiums are deductible, the payout on a claim is taxable as a trading receipt in the year of receipt. The net effect is broadly neutral — the tax saved on premiums is offset by the tax paid on the payout — but the deductibility reduces the effective premium cost during the policy term.
For non-UK companies, these HMRC rules do not apply. The deductibility of premiums depends on the tax law of the company's jurisdiction. Many of the countries used by internationally mobile business owners — Cyprus, UAE, BVI — have low or zero corporate tax rates, making deductibility less relevant. The focus shifts to how the policy interacts with the company's specific legal and regulatory framework.
Common Exclusions to Check
Before accepting a key person policy, always review the full policy conditions for the following common exclusions:
Pre-existing medical conditions: any condition known to the insured at application that was not disclosed. Non-disclosure at application can void the entire policy, not just the relevant claim.
Critical illness conditions list: for combined life and critical illness policies, check the exact definition of each covered condition. "Cancer" is not a single condition — different insurers define qualifying cancer diagnoses differently, and some exclude early-stage cancers, skin cancers, or non-invasive conditions.
Survival period: for critical illness claims, most policies require the insured to survive for a minimum period (typically 14–30 days) after diagnosis. Death within the survival period typically triggers the life cover rather than the critical illness benefit.
Hazardous activities and occupations: if the key person's role involves private flying, offshore work, or regular international travel to high-risk destinations, check whether the policy imposes exclusions or premium loadings.
Business travel and terrorism: some older policies contain exclusions for death resulting from acts of terrorism or war. Check whether these apply, particularly for key persons who travel frequently to higher-risk regions.
The Renewal and Review Process
Key person insurance is not a set-and-forget product. The policy should be formally reviewed:
Annually, as part of the company's regular insurance review. Check whether the sum assured still reflects the key person's current contribution. If the business has grown by 30% since the policy was written, the cover may be materially inadequate.
On any material change to the business: a new loan or guarantee that increases the financial exposure; a change in the key person's role that changes their profit contribution; a change in shareholder structure that affects the relationship between the key person cover and any shareholder protection policy.
On any material change to the key person's personal circumstances: a serious health diagnosis, a lifestyle change, or a change in their country of residence (which may affect policy validity or premium loading).
Five years before policy expiry: if the policy is approaching its end date and the financial exposure continues, renewing or extending the policy should be considered before the existing term expires. Premiums will increase with age — early review is beneficial.
How Global Investments Can Help
We assess key person risk across internationally mobile business structures — whether the company is registered in the UK, Cyprus, UAE, BVI, or elsewhere. We work with the leading international insurers, advise on appropriate sum assured levels, manage the underwriting process, and review the cover annually as your business evolves.
To discuss your key person protection needs, contact us here.
The information in this guide is for general guidance only. Tax treatment depends on the specific structure of the policy and the jurisdiction of the company. Always take specialist professional advice before arranging key person insurance.
Frequently Asked Questions
What evidence do insurers need to assess key person risk?
Insurers typically require: the last 2–3 years of company accounts (or management accounts if recent); a breakdown of the key person's contribution to revenue or gross profit; details of any business loans the key person has guaranteed; the company's Articles of Association or shareholder agreement if the cover is linked to share ownership; and the insured individual's personal health declaration. For large sums assured (typically above £2–3 million), a formal business valuation or accountant's report may be required.
What is the difference between a revenue loss and a capital loss key person policy?
A revenue loss policy is designed to replace the ongoing trading income the business would lose — calculated as a multiple of annual profit contribution. A capital loss policy (less common) is designed to replace the capital value the key person represents to the business — relevant where their departure would reduce the business's sale value. The two are sometimes combined where the key person is both a profit contributor and a value driver. Insurers assess these differently, and the evidence required differs.
How is a key person policy held within a limited company?
The company takes out the policy in its own name — the company is the policyholder, premium payer, and beneficiary. The policy does not need to be written in trust (unlike personal policies) because the company is the intended recipient of the payout. For accounting purposes, the premium is treated as a company expense and the policy as a company asset. Whether the premiums are deductible depends on HMRC's tests — specialist advice is required.
How often should a key person policy be reviewed?
The policy should be reviewed whenever there is a material change in the business — typically at least annually. Trigger events include: a significant increase or decrease in revenue, a new business loan or guarantee, a change in shareholding, the departure or addition of key individuals, or a significant change in the key person's health or lifestyle. A policy that was adequate when written may be seriously underfunded if the business has grown significantly.
What are the most common exclusions in key person policies?
Standard exclusions include: death or critical illness resulting from a pre-existing medical condition not disclosed at application; self-inflicted injury; war or terrorism (in some policies); and participation in hazardous activities (extreme sports, private aviation, offshore diving). For critical illness covers, the conditions list and definitions vary by provider — some policies exclude certain types of cancer or require specific surgical procedures to qualify. Always check the full policy conditions before recommending or accepting a policy.
This guide is for general information only and does not constitute financial or insurance advice. Policy terms, premium rates, and insurer eligibility criteria change — always verify current terms with a qualified independent adviser before taking out any policy.