Life Insurance · Business Protection · UK Guide 2026

Key person insurance

Q: Are key person insurance premiums tax-deductible?

Sometimes. Under HMRC Anderson principles, premiums may be a deductible business expense where the sole purpose is to protect trading profits, the life insured is an employee rather than a substantial shareholder, and the cover is short-term and annually renewable. Where those tests are not met, premiums are usually not deductible. Always confirm with a tax adviser.

A plain-English UK guide to key person (also called key man) insurance in 2026: what it protects, how a business decides how much cover it needs, how premiums and payouts are taxed under HMRC’s Anderson principles, and how it differs from shareholder and relevant life cover.

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Quick answer

What is key person insurance?

What it is: a life (and often critical illness) policy a business takes out on a key individual — the company owns the policy, pays the premiums and receives any payout.
What it protects: the business against the financial hit of losing someone central to its profits, such as a founder, director, lead salesperson or a person with rare specialist skills.
What the payout is for: replacing lost profit, recruiting and training a replacement, reassuring lenders and customers, and keeping the business trading through the gap.
Tax: under HMRC’s Anderson principles premiums can be a deductible business expense in some cases — but where they are, the payout is usually taxable. The treatment depends on the facts, so take professional advice.

What drives the cost

What affects key person insurance premiums

Factor	Why it matters	Effect on premium
Age & health of the key person	Older or higher-risk lives cost more to insure	Higher premium
Sum assured	Often based on a multiple of salary or the person’s share of profit	Larger cover means a higher premium
Policy term	Usually a short-term, renewable term policy matched to the risk period	Longer term means a higher premium
Cover type	Life-only, or life plus critical illness	Adding critical illness increases the premium
Smoker status & occupation	Standard life-underwriting factors	Smokers and higher-risk roles pay more
How cover is calculated	Common methods: a multiple of salary, the key person’s share of profit, or the cost to replace them	The method sets the sum assured, and so the premium

Indicative only — there is no standard premium; insurers underwrite each key person individually. Not a quote.

Who it is for

Which businesses need key person cover?

Key person insurance is most valuable for businesses whose profits, funding or day-to-day running depend heavily on one or a few individuals — typically small and medium-sized companies, owner-managed firms and startups. A “key person” is anyone whose death or serious illness would materially harm the business: a founder or managing director, a leading salesperson, a technical expert, or someone who personally secures or guarantees finance.

Sizing the cover is a judgement rather than a fixed formula. Common approaches include a multiple of the person’s salary, their share of gross or net profit, or the realistic cost of replacing them (recruitment, training and lost revenue during the gap). For how life cover, terms and sums assured work in general, see the life insurance hub.

The tax position

How key person insurance is taxed

HMRC decides the tax treatment using the long-standing Anderson principles, which date from a 1944 parliamentary statement. Broadly, premiums may be allowed as a tax-deductible business expense only where the policy’s sole purpose is to protect trading profits (not to repay a loan or cover a capital loss), the life insured is an employee rather than a substantial shareholder, and the cover is short-term and annually renewable, matched to the person’s value to the business.

The treatment of premiums and of any payout are linked: if the premiums are tax-deductible, the payout is normally taxed as a trading receipt and subject to corporation tax; if the premiums are not deductible, the payout is more likely to be received free of tax. Where the life insured is a major shareholder, tax relief on premiums is unlikely. Because the outcome turns on the exact facts and on HMRC’s view, a business should confirm the position with its accountant or a tax adviser before relying on it.

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Related cover

Key person, shareholder and relevant life cover

Key person insurance is one of several business protection products, and each solves a different problem:

Key person insurance pays the business to cushion lost profit and replacement costs when a key individual dies or becomes seriously ill.
Shareholder or partnership protection provides funds for the surviving owners to buy the deceased owner’s share, keeping control of the business.
Business loan protection repays a specific business loan, overdraft or director’s loan if the guarantor dies or is critically ill.
Relevant life cover is a tax-efficient, individual death-in-service policy a company can provide for a single employee or director, paying their family rather than the business.

Many businesses combine more than one. To understand the underlying life cover, browse the life insurance hub or our guide to what life insurance is.

Common questions

Key person insurance: FAQs

What is key person insurance?

It is a life, or life and critical illness, policy that a business takes out on the life of a key individual. The company owns the policy, pays the premiums and receives any payout, which is used to protect the business against the financial loss caused by that person dying or becoming seriously ill.

Who counts as a key person?

A key person is anyone whose loss would materially damage the business. That often means a founder or managing director, a leading salesperson, a person with rare technical or specialist skills, or someone who personally secures the firm’s finance. Smaller and owner-managed businesses tend to be the most exposed.

How much key person cover does a business need?

There is no single rule. Common methods are a multiple of the key person’s salary, their share of gross or net profit, or the realistic cost of replacing them, including recruitment, training and lost revenue. The right figure is a commercial judgement based on how much profit or funding depends on that individual.

Are key person insurance premiums tax-deductible?

Sometimes. Under HMRC’s Anderson principles, premiums may be a deductible business expense where the sole purpose is to protect trading profits, the life insured is an employee rather than a substantial shareholder, and the cover is short-term and annually renewable. Where those tests are not met, premiums are usually not deductible. Always confirm with a tax adviser.

Is a key person insurance payout taxable?

It depends on how the premiums were treated. In broad terms, if the premiums were tax-deductible, the payout is normally taxed as a trading receipt and subject to corporation tax. If the premiums were not deductible, the payout is more likely to be received free of tax. The two are linked, so the treatment should be checked case by case.

What is the difference between key person and shareholder protection?

Key person insurance pays the business to cover lost profit and the cost of replacing a key individual. Shareholder or partnership protection instead gives the surviving owners the funds to buy the deceased owner’s stake, so control of the business stays with them. Many firms hold both alongside business loan protection.

How much does key person insurance cost?

There is no standard premium. The cost depends on the key person’s age and health, the sum assured, the term, whether critical illness is included, and smoker status and occupation. Because each life is underwritten individually, comparing several insurers for the same cover is the best way to gauge a realistic price.

Information only — not financial advice and not tax advice. Figures are indicative and not a quote. Tax treatment depends on individual circumstances and HMRC practice and may change. My Insurance Expert is not an FCA-authorised intermediary and does not arrange or sell policies. Last updated: 2026-06-18

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