Key person insurance is taken out by small or medium-sized enterprises (SMEs) to protect against the financial impact of the death of long-term illness of a named member of the business.

The key person can be any member of staff who is particularly valuable to the company, either through their knowledge, expertise or level of contribution to the overall work.

It does not cover quantified losses when the person named by the policy dies or becomes seriously ill but pays out a specific cash amount detailed on the policy to go towards supporting the business's continuity and keep it profitable.

The pay-out can cover expenses such as finding and training a successor and to cover any business loss resulting from the loss of the named person's contribution to the company.

A key person insurance policy has no legal definition and ends when the named person is no longer useful to the business.

Who can be named on key person insurance?
An SME can nominate anyone with a direct link to the business, if they would suffer financial difficulty by that person's loss. This could be a partner or director or someone responsible for a key part of the business, such as the head account or public relations advisor. It could simply be someone with unique expertise or talent that is fundamental to the company's success.

What are the tax implications of key person insurance?
Tax relief can be claimed on key person insurance policy premiums if:

• The relationship between the policyholder and the insured does not go beyond employer and employee (unless they are shareholding directors).
• Only loss of profits are covered
• The policy covers a reasonable term. This usually five years but can go up to ten.
• The insured employee is not a significant shareholder. Usually anything under 5% is allowed.

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