What is key person insurance?

Most small businesses depend heavily on one or two individuals whose skills, relationships, or knowledge are central to their ability to operate and generate revenue. This creates a risk that is often overlooked in early-stage planning — what happens to the business financially if one of those key individuals becomes seriously ill, is incapacitated, or dies? Key person insurance is specifically designed to address this scenario.

Key person insurance is a life assurance or critical illness policy taken out by a business on the life or health of an individual whose absence would significantly impact the company's revenue or operations. The business pays the premiums and receives the payout if the key person dies or suffers a covered critical illness. The payout is designed to give the business financial breathing space — to cover recruitment costs, lost revenue, or loan repayments — while it adapts to the loss.

Key person insurance is relevant for any business where the departure or incapacity of a specific individual would create a material financial impact — which describes most founder-led businesses at the early stage. It is also sometimes required by lenders as a condition of a business loan. Our guide to key person insurance for UK founders covers how policies work and what level of cover is typically appropriate.