**Take Home** Protection · 2025/26 # Key person insurance: protecting the company, not the person Key person insurance is a policy a company takes out on the life (and often the critical illness) of someone the business depends on, usually a founder, director or vital employee. If that person dies or becomes seriously ill, the policy pays a lump sum to the company, not the family, to cover lost profit, recruitment and loan repayments. Here is how it works and how the tax falls. CB [Charlie Bailey](https://www.linkedin.com/in/charliebaileyy/) · Founder, Take Home · 6 years in UK accountancy Published 2026-05-30 · Updated 2026-05-30 · 3-min read On this page - [Estimate the cover](#calc) - [What it is](#what) - [How cover is sized](#size) - [The tax treatment](#tax) - [Versus relevant life and shareholder cover](#vs) - [FAQ](#faq) ## Key takeaways - Key person insurance pays the company a lump sum if a key person dies or, on some policies, is critically ill. - It exists to cover lost profit, the cost of recruiting a replacement, and any loan the person guarantees. - Cover is usually sized as a multiple of salary, a share of gross profit, or the size of guaranteed borrowing. - Premiums can be a deductible business expense (the Anderson principle), but the rules are specific, so check with your accountant. - It is different from a relevant life policy (which protects the family) and shareholder protection (which buys back shares). ## Estimate the cover Quick estimate: how much key person cover? The key person's salary, or the gross profit you'd lose without them (£/yr) Cover as a multiple 2x (conservative)5x (common)7x10x (heavy reliance) A common rule of thumb only, not a recommendation. Cover is often set at a multiple of the person's salary, or the proportion of gross profit attributable to them, or the size of any loan they guarantee. Informational. ## What key person insurance is Most small companies have one or two people the business genuinely cannot run without. Key person insurance (sometimes called keyman insurance) protects the company against the financial hit of losing one of them to death or serious illness. The company owns the policy, pays the premiums, and is the beneficiary. The payout lands in the company's bank account, where it can replace lost profit while the business recovers, fund the recruitment and training of a replacement, or repay a loan the person had guaranteed. ## How the cover is sized There is no single formula, but three approaches are common, and lenders and insurers recognise all of them: - Multiple of salary. A straightforward proxy, often 5 to 10 times the person's remuneration. - Share of gross profit. Estimate the proportion of gross profit attributable to the person, then multiply by the years it would take to recover. - Loan cover. If the person personally guarantees a bank loan or director's loan, the outstanding balance sets a floor for cover. The estimator above uses the salary-multiple method as a starting point. In practice you would sanity-check it against the other two. ## The tax treatment The tax position turns on what is known as the Anderson principle, named after a 1920s case. Premiums are generally deductible for Corporation Tax where the cover is on an employee (not a substantial shareholder), is for loss of profit only, and is short-term and annually renewable. Where premiums are deductible, the payout is usually treated as a taxable trading receipt. Where the premiums are not deductible (for example cover on a major shareholder, or cover linked to a loan), the payout is more likely to be tax-free. The two sides tend to mirror each other, and the detail matters, so this is one to confirm with your accountant before you set the policy up. ## Versus relevant life and shareholder protection Three company-linked policies are easy to confuse: - Key person insurance pays the company for the loss of a key individual. - Relevant life cover pays the individual's family , like a death-in-service benefit. See our guide to the [relevant life policy](/relevant-life-policy). - Shareholder protection gives the surviving owners the funds to buy back a deceased shareholder's stake, keeping control of the company. Many owner-managed companies end up with a combination. Modelling what each one would actually pay out, and what it costs, alongside your wider position is exactly what Take Home is for. **Information, not advice.** Take Home provides information and calculations, not regulated financial or tax advice. Your circumstances may differ and the figures here are illustrative for the 2025/26 tax year. Speak to a qualified adviser or accountant before acting on anything you read here. The whole picture ## See where protection fits your finances. Take Home shows how cover sits alongside your tax, pension and take-home, with no jargon and no pressure. [Join the waitlist →](/contact) ## Related guides [Guide ### Relevant life policy: tax-efficient life cover for directors A relevant life policy is a death-in-service style life insurance policy that a limited company takes out and pays for on behalf o…](/relevant-life-policy) [Guide ### Income protection for the self-employed Income protection pays you a regular, usually tax-free, income if illness or injury stops you working. For the self-employed it ma…](/income-protection-self-employed) [Guide ### What's the optimal director salary in the UK for 2025/26? For most UK limited company directors with no other income, the most tax-efficient salary in 2025/26 is £12,570, the personal allo…](/optimal-director-salary-2025-26) [Director ### Limited Company Director Take-Home The director take-home pillar, full breakdown plus working calculator.](/limited-company-director-take-home) FAQ ## Frequently asked What is key person insurance? It is a policy a company takes out on the life, and often the critical illness, of a person the business depends on. If that person dies or becomes seriously ill, the company receives a lump sum to cover lost profit, recruitment, or a loan the person guaranteed. Who receives the payout from key person insurance? The company, not the family. The business owns the policy and is the beneficiary, so the money goes into the company's bank account to help it recover from losing the key person. Is key person insurance tax-deductible? Often, but not always. Under the Anderson principle, premiums are generally deductible for Corporation Tax where the cover is on an employee who is not a substantial shareholder, is for loss of profit, and is short-term annually renewable. Where premiums are deductible the payout is usually taxable, so confirm the detail with your accountant. How much key person cover do I need? There is no fixed rule. Common approaches are a multiple of the person's salary (often 5 to 10 times), the share of gross profit attributable to them, or the size of any loan they guarantee. Most companies cross-check more than one method. What's the difference between key person insurance and a relevant life policy? Key person insurance pays the company for the loss of a key individual. A relevant life policy pays the individual's family, working like a death-in-service benefit. They solve different problems and are often held together.