Key Person Insurance

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Key person insurance, also known as key man insurance or key employee insurance, is a type of life insurance policy that a company can use on a key employee or executive. This type of insurance provides financial protection to the company in the event that the key person can no longer work for reasons such as death, chronic sickness, or disability.

This specialised insurance policy is designed to safeguard the financial well-being of a business by providing coverage for the loss of a key individual whose contributions are crucial to the company’s success. This can include covering costs for recruiting and training a replacement, compensating for a decrease in revenue, or reassuring lenders and investors.

By providing a safety net and peace of mind, key person insurance empowers businesses to continue operating smoothly and thriving even during difficult circumstances. Get a quote now by using our quick form.

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What Is Key Person Insurance?

Key person insurance pays a death benefit or a disability benefit to the company if a key member of the company is forced to stop working. This can be used to cover the costs of finding and training a replacement, or to compensate for lost profits. 

Key person insurance is typically used by small businesses or businesses that rely heavily on the expertise or leadership of a few key individuals.

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Do I Need Key Person Insurance?

  • You may need key person insurance if you have an employee or executive who is vital to the success of your company.
  • For example, if you have a small business and the loss of a key employee would significantly impact your business’s ability to function, key person insurance could provide financial protection. 
  • Key person insurance can also help to protect your business’s reputation by ensuring that there is a plan in place to handle the departure of a key employee.
  • Losing a key person might have a huge negative effect on the confidence of your stakeholders.
  • Key person insurance can act as a buffer, ensuring that your business can survive in that person’s absence, giving you time to make long-term plans for your business’s future. 

What’s the Difference Between Key Person Insurance and Life Insurance?

Key person insurance and life insurance are similar in that both provide financial protection in the event of a person’s death. However, there are some key differences between these two insurance products:

Key Person Insurance

Life Insurance

The primary purpose of key person insurance is to provide financial protection for the business in the event of the death, critical sickness, or disability of a key employee.
The primary purpose of life insurance is to provide financial protection for the insured individual’s family in the event of their death.
Policy is owned by the business and the beneficiary is the company.
Policy is typically owned by the insured individual or their family. The beneficiary of the policy is typically the insured individual’s spouse, children, or other family members.
Death benefit is paid to the company
Death benefit is paid to the family of the deceased.
Premiums are paid by the business.
Premiums are typically paid by the individual who owns the policy

What Is the Difference Between Key Person Insurance and Business Insurance?

Business insurance can refer to a number of products, including but not limited to asset protection, liability insurance, and professional indemnity. Although there are many types of business insurance, none of these terms refers to protection to your business if you were to lose a key person.

Is Key Person Insurance Tax Deductible?

  • It is possible to arrange key person insurance as an allowable expense so long as you are insuring a non-shareholding employee.
  • This means that the business can claim a tax deduction for the premiums it pays on a key person insurance policy. 
  • However, there are some limitations and restrictions on the tax deductibility of key person insurance premiums, and the specifics will depend on the laws of your country and your business’s tax situation.

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How Much Cover Do I Need With Key Person Insurance?

Although there are no rules on how to calculate someone’s worth within your business, you can make some informed estimates. 

If the key person was directly relevant to your gross income, then you can make a rough estimate of how much they were worth. For example, if you had a sales executive who was worth 25% of your total company sales, your insurance company would multiply their % contribution by the average gross profit, and then double that. In this case, that would be (25*2*gross profit).

However, if your key person does not directly produce revenue (such as being the head of HR, or a financial director) their loss may be more difficult to calculate. You can still get an idea of how much coverage you need by considering the following:

  • The value of the key person to your business: Consider the key person’s contributions to the company’s revenue, profits, and overall success, both in the short-term and long-term.
  • Costs associated with finding and training a replacement: If you are in the position where you are able to replace this person, you need to consider the costs of recruitment, advertising, training, and onboarding. 
  • Outstanding debts: If the key person had co-signed any business deals, or other relevant debts, you might have to consider the impact of their loss on your business, and whether or not you are able to easily repay these debts.
  • The key person’s family: You might want to consider providing a financial cushion to support the key person’s family in the event of their loss or sickness.

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