Written by Gareth Simon
Ward Goodman
June 20, 2025
Could your business survive the unexpected loss of its most vital team member? For many, the answer is a sobering no. But with the right planning, your business can remain resilient in the face of unforeseen challenges.
Running a business means wearing many hats, but have you ever stopped to think about what would happen if a vital person in your company couldn’t work tomorrow? Losing a key team member through illness, disability, or death can cause far greater disruption than you might expect – impacting not just finances, but also morale, client relationships, and crucial projects. With the right protection, however, you can plan ahead and stay resilient.
What is Key Person Insurance?
Key person insurance is a financial safeguard designed to protect your business if a crucial employee or owner dies or is diagnosed with a serious illness. This protection pays a lump sum directly to your business, not the individual’s family, helping to cover lost income, repay loans linked to that individual, and bridge the gap while you find and train a suitable replacement. It applies to all kinds of businesses – sole traders, partnerships, limited companies – and can be tailored to your specific structure.
Why is it Important? The Hidden Risks of Losing a Key Person
Your people are your greatest asset. They bring in new business, maintain key relationships, drive growth, and often hold unique skills or institutional knowledge. Without key person insurance, an unexpected loss could mean:
- Immediate Business Closure: More than one in four (26%) UK SMEs report they would be forced to close their doors immediately if a key person died or became critically ill. [1]
- Short-Term Business Collapse: Nearly two-thirds (59%) of UK SMEs indicate they would cease trading within 12 months following the loss of a key individual. [2]
- Risk to Reputation and Loss of Customer Trust: Projects may stall, key client contacts disappear, leading to a perception of disorganisation and potential client exodus.
- Impact on Team Morale and Productivity: The remaining team can become demotivated, stressed, and less productive without their key colleague.
- Substantial Recruitment, Training, and Onboarding Costs: Finding the right replacement takes significant time and financial investment.
What Does it Cover?
Key person insurance policies are typically triggered by specific events, ensuring your business receives a payout when it’s most needed:
- Death: The passing of the insured key person.
- Critical Illness: Diagnosis of a specified severe illness (e.g., cancer, heart attack, stroke).
- Long-Term Disability: A disability that permanently prevents the key person from performing their role.
How Does it Work?
Your business takes out the policy and pays the premiums. If the insured person becomes critically ill or dies, the insurer pays out an agreed lump sum to the business (the beneficiary). This money can then be strategically used to:
- Hire temporary or permanent replacements.
- Cover lost profit and ongoing operational expenses.
- Pay off business loans or overdrafts that were dependent on that individual’s contribution or personal guarantee.
- Provide an ex-gratia payment or death-in-service benefit to the family of the key person, if the business chooses to do so.
Steps to Protect Your Business
- Identify Key People: Who is truly vital to the day-to-day running and financial health of your company? Think beyond just directors. Typical examples include senior managers, top salespeople, specialists with unique skills, or operational linchpins.
- Calculate the Right Level of Cover: This isn’t a one-size-fits-all. Consider their contribution to annual profits, the estimated time and cost to find and train a replacement, any specific projects or contracts they manage, and any loans for which they are a guarantor.
- Choose Suitable Cover: Options include:
- Life Insurance: Pays out only upon the death of the key person.
- Critical Illness Cover: Pays out upon diagnosis of a specified critical illness.
- Combined Policies: Offer cover for both death and critical illness.
- Relevant Life Cover: A tax-efficient option for employees, providing death-in-service benefits. Premiums are generally treated as an allowable business expense for corporation tax, and the payout is typically free from income tax and inheritance tax for the recipient.
- Review Regularly: Your business is dynamic – your protection should be too. Review your policies each year or whenever you expand, take on new staff, secure significant new contracts, or enter new markets.
Real Example: Mitigating Disruption
Imagine a director who handles most supplier negotiations becomes seriously ill. Without key person insurance, the business could face immediate supply chain issues and significant financial strain. However, with a key person policy in place, a lump sum pays out, allowing co-directors to:
- Hire temporary consultants with negotiation expertise.
- Train another team member to take on the responsibilities.
- Offset lost profits during the period of adaptation and transition.
This proactive step prevents project delays, retains key clients, and ensures the business can continue its growth trajectory even in challenging circumstances.
How Key Person Insurance Links to Wider Business Protection
Key person insurance is just one crucial piece of a robust business protection plan. It works seamlessly alongside other vital agreements to keep your business stable in unforeseen situations:
- Shareholder Protection: Ensures that if a shareholder dies or becomes critically ill, the remaining shareholders can buy their shares, preventing them from falling into unwelcome hands and ensuring continuity of ownership.
- Partnership Agreements: Outline what happens to the business in the event a partner dies or leaves, often including provisions for buying out their share.
By safeguarding your people, you’re safeguarding your entire company’s future.
Is Your Business Protected?
If losing a vital team member tomorrow would put your business at risk, now is the time to act. Ward Goodman’s experts can help you identify your key people, calculate your protection needs, and integrate key person cover into your wider succession and continuity planning.
Contact us today to secure your business’s future – and gain the ultimate peace of mind that your team, clients, and legacy are protected no matter what tomorrow brings.
Source: [2] https://adviser.legalandgeneral.com/l/689583/2021-09-22/m2p3g
