Key Man Insurance Calculator
Losing a key person to death or serious illness can hit a small business harder than almost any other single event — lost sales they were responsible for, the cost and disruption of finding a replacement, and sometimes lenders calling in loans tied to that person’s involvement. Key person insurance provides a lump sum to the business itself when this happens, and this calculator estimates how much cover makes sense and what it might cost.
Keyman Insurance Calculator
Calculate the recommended keyman (key person) insurance cover for your business. Protects against financial loss if a key employee dies or becomes critically ill.
Why the Formula Uses the Higher of Two Numbers
This calculator recommends cover based on whichever is higher: five times the key person’s salary, or the specific percentage of company profit genuinely attributable to them. Salary alone can understate true value — a relatively modest-salaried founder or specialist can still be responsible for a disproportionate share of revenue or client relationships, which the profit-based figure captures more directly. Using the higher of the two, rather than picking one method in isolation, generally produces a more realistic figure than either measure would alone, particularly for smaller businesses where an individual’s salary and their actual value to the business can diverge considerably.
Estimating the profit-attribution percentage honestly is worth some genuine thought rather than a rough guess — considering what would realistically happen to revenue, client retention and ongoing operations without this specific person gives a more accurate figure than simply assigning an arbitrary round number.
The Tax Relief That Isn’t Always Guaranteed
Key person insurance premiums can sometimes be treated as a deductible business expense for corporation tax purposes, but this is genuinely not automatic — HMRC applies a “wholly and exclusively” test, generally requiring the policy to be a short-term arrangement covering loss of profit, with the business as both owner and beneficiary, rather than a long-term arrangement that primarily benefits an individual’s family. This calculator shows an estimated tax relief figure, but whether relief genuinely applies depends on how the specific policy is structured, which is exactly why the calculator flags this explicitly rather than presenting the relief as a certainty.
Getting this structuring right from the outset, with proper accountant and insurer input, is considerably easier than trying to correct it after a policy is already in place — worth treating as part of setting up the cover itself, not an afterthought to address only if HMRC ever questions it.
When Salary Understates the Real Number
A technical co-founder on a modest £35,000 salary but responsible for roughly 35% of a £600,000 profit line illustrates exactly why this calculator checks both figures: five times salary alone would suggest £175,000 of cover, while the profit-based calculation points to £210,000 instead — a meaningfully higher figure that better reflects this person’s true value to the business than their salary alone would ever capture.
Who Actually Counts as a Key Person
A key person is not necessarily the most senior job title — it is whoever’s loss would genuinely and materially damage the business, whether that is a founder with irreplaceable client relationships, a technical specialist whose knowledge cannot easily be replicated, or a salesperson responsible for a large share of revenue. Smaller businesses often have just one or two such people; larger ones may have several across different functions. Identifying the right person or people to insure matters as much as getting the cover amount right, since insuring the wrong role provides little genuine protection regardless of how accurately the sum insured is calculated.
Life, Critical Illness, or Both
Standard life cover alone protects against the key person’s death specifically. Adding critical illness cover extends protection to a serious diagnosis that takes them out of the business for an extended period without necessarily being fatal — a genuinely common and disruptive scenario that life cover alone does not address. In some ways, a lengthy illness absence with an uncertain return date can be harder for a business to plan around than a death, since the business does not know whether or when to permanently replace the person during the uncertainty. Combined life and critical illness cover costs meaningfully more than either alone, reflecting the broader protection, but is worth considering specifically because a long absence due to illness can be just as damaging to a business as a death, sometimes more so given the additional uncertainty about eventual return. If you are also considering cover for a serious diagnosis on a personal basis rather than for the business, our Life Insurance Calculator covers that separately, and our Business Interruption Insurance Calculator is worth reviewing alongside key person cover, since both protect business continuity from different angles.
Frequently Asked Questions
Who owns a key person insurance policy?
The business itself is both the owner and the beneficiary of the policy, receiving the payout directly, rather than the key person’s family, which is the key structural difference from a personal life insurance policy on the same individual.
Does the key person need to consent to being insured?
Yes — the business needs “insurable interest” and the key person’s consent and cooperation for the medical underwriting process, since the policy cannot be taken out on someone without their knowledge or agreement.
Is the payout itself taxable?
This depends on how the policy was structured and whether premiums received tax relief — a policy that received relief as a trading expense typically has a taxable payout, while one that did not receive relief typically does not, so this is worth confirming with an accountant for your specific arrangement.
Can a small business with one owner-director use key person insurance?
Yes — a sole owner-director is very often the clearest example of a key person, and losing them can be existential for the business, making this exactly the kind of situation the cover is designed to address.
How often should cover be reviewed?
Annually, or whenever the business’s profit, the key person’s role, or their salary changes meaningfully, since the original sum insured can become outdated as the business grows or circumstances change.
What happens if the key person leaves the business voluntarily?
The policy generally continues, since it was taken out on the individual, but it no longer serves its original purpose once they are no longer with the business — it is usually cancelled or reassigned to a new key person at that point, rather than left running unnecessarily.
Important Information
This calculator provides an estimate for general information purposes only and does not constitute insurance, tax or financial advice. Tax treatment depends on individual policy structure and should be confirmed with an accountant. For advice specific to your business, consult a qualified adviser. See our Disclaimer for further information.