Would the walls fall down if that one person didn’t show up tomorrow?
Not a question SME owners like to ponder. But, it is absolutely worth asking.
Yes, a business is a team effort, but oftentimes a company will have significant individuals who, without them, the place would be left in dust and rubble.
It could be the business founder who is the core of all relationships, the sales lead who is generating a whole lot of your revenue or even the operations manager who has been there from the start and knows all the little ins and outs of the business.
Key person insurance is the knight in shining armour you need to protect, well…your knight in shining armour.
It isn’t about fear and worry, it’s about protecting what you’ve worked ever so hard to build.
Let’s break it all down.
What Is Key Person Insurance and How Does It Work?
At its core, key person insurance is a safety net. It’s a policy your business takes out on someone critical to its operations. If that person dies or becomes seriously ill, the business receives a lump sum payout.
That payout can make all the difference: covering lost income, hiring and training a replacement, or simply giving you time to breathe while you figure out the next move.
Unlike personal life insurance, which supports families, key person cover is designed to support the business itself. You choose who’s covered. You pay the premiums. And if the worst happens, you receive the funds, to keep the lights on and the wheels turning.
Why Companies Can’t Afford to Overlook SNE Business Insurance
Here’s the reality: most small businesses couldn’t survive the sudden loss of a key person.
59% of UK SMEs would shut down within a year if a key team member died or fell critically ill. Yet very little actually have key person cover in place.
That’s not because they don’t care, it’s usually because they don’t know. Key person protection often gets overlooked when sorting out SME business insurance, which tends to focus on property, liability, or vehicles. But this is about protecting what keeps the whole thing running: your people.
Larger companies can absorb a hit. Small businesses? They run lean. One absence can mean missed deadlines, lost clients, cancelled contracts, and mounting pressure, on top of the emotional toll.
Key person insurance is there to take the financial panic out of a personal crisis.
The 2025 Example: One Business, One Decision That Changed Everything
Let’s take an example from earlier this year.
A creative consultancy in London relied heavily on its co-founder, who led client delivery and operations. When she was diagnosed with a serious illness, the future looked uncertain. Would they need to pause projects? Could they keep staff? What would clients think?
Fortunately, they’d taken out key person cover just months before. The payout allowed them to bring in freelance support, reassure their clients, and protect cashflow. They didn’t have to panic or cut corners. They stayed afloat, and their reputation stayed intact.
That’s the power of planning ahead.
Who Should You Cover and For How Much?
We’ll start by saying: it’s going to be incredibly personal and bespoke to each business who you decide to cover.
You can start with asking these questions, though:
- What would be the actual cost of replacing this individual?
- What area would it impact? Sales? Delivery? Operations?
- How long would it take you to get everything back on track after they’re gone?
Once you’ve identified your key players, you can choose cover based on:
- Salary multiples – often 5–10× the person’s salary
- Profit contribution – especially for revenue-driving roles
- Business risk – factoring in recruitment, training, and lost opportunity
You can choose:
- Life cover only (cheaper, straightforward)
- Life and critical illness cover (more expensive, but broader protection)
- Income protection (less common but valuable for longer-term absence)
An adviser can help shape this around your structure, goals, and budget.
Tax, Ownership, and the Practical Bits
In many cases, your business can pay for and own the policy, especially if you’re a limited company or LLP. For partnerships, the setup can vary depending on your structure, so it’s worth checking early.
Tax-wise, if the cover is purely there to protect your profits, premiums might be deductible, but that usually means the payout will be taxable. If it’s tied to shares, loans, or exits, the rules change.
There’s no one-size-fits-all answer here, but that’s why advice matters.
You Don’t Need to Go This Alone
No one wants to imagine losing a colleague, let alone plan for it. But business protection is just that: protection. It doesn’t mean you expect the worst. It means you’re committed to weathering any storm.
Key person insurance helps you buy time, reduce stress, and make decisions with clarity, even in the most difficult moments. And in the process, it gives you, your team, and your clients one simple thing: peace of mind.
If you’re not sure whether you need it, or how much cover is right, we’re here to help. No jargon, no pressure. Just clear, practical advice from people who understand what’s at stake; book a call with one of our Protection Advisers.
