Key Person Insurance for International Businesses
Every business has people it cannot easily replace. For some businesses, losing a single individual — through death or serious illness — would cause immediate and measurable financial harm: lost revenue, disrupted client relationships, inability to deliver projects, or the need to spend significant sums recruiting and training a replacement.
Key person insurance (also called keyman insurance or key man cover) is the mechanism a business uses to protect itself against this risk. The company insures the lives (and sometimes the health) of those individuals whose loss would hurt the business, and receives a lump sum to absorb that hurt.
For internationally mobile businesses — with owners, directors and key employees spread across multiple jurisdictions — understanding how keyman insurance works, how it is taxed, and how to structure it correctly is as important as understanding the product itself.
This guide is for information only. Tax treatment of keyman insurance varies by jurisdiction and depends on the specific policy and circumstances. Always take independent advice.
Who Is a Key Person?
A key person for insurance purposes is an individual whose:
- Death or critical illness would lead to a measurable reduction in the company's revenue or profits, or
- Replacement would require significant expenditure (recruitment fees, training, salary uplift for a replacement), or
- Loss would trigger financial obligations — for example, a personal guarantee to a bank that would become callable on death
Common key persons in an international business:
The founder/owner-director: in many small and medium businesses, the owner is the business. Client relationships, strategic direction, technical expertise and the bank's goodwill all depend on one individual. This person is almost always a key person.
Specialist technical staff: an engineer, software architect, creative director or other specialist with rare skills that are essential to the delivery of the business's product or service.
Client relationship holders: a sales director or account manager whose personal relationships with key clients represent a significant proportion of revenue. The risk is not just that the person is gone — it is that the clients follow them or defect during the transition.
Executives with financial guarantees: directors who have personally guaranteed the company's banking facilities create a specific financial risk — the guarantee may be callable on death, requiring the company to repay or refinance on short notice.
The right question is always economic: if this person were gone tomorrow, what would it cost the business?
How Keyman Insurance Works
Structure:
- The company (not the individual) takes out a life assurance and/or critical illness policy on the key person's life
- The company pays the premiums
- The company is the policyholder and the sole beneficiary of the policy
- On the key person's death or qualifying critical illness, the insurance company pays the sum assured to the company
The company then uses the proceeds as it sees fit — to fund a recruitment and training programme, to replace lost profits during the transition period, to repay a bank loan that was guaranteed by the deceased, or to stabilise the business during a period of reduced performance.
Important distinction: unlike shareholder protection (where the benefit funds a share buy-out), keyman insurance protects the business operations, not the ownership structure. A business may need both — keyman cover for the trading risk, and shareholder protection for the ownership succession.
What Uses Can Proceeds Be Applied To?
Replacing Lost Profits
The most common use. If the company estimates that losing a key salesperson would reduce annual revenue by £500,000 for the following three years whilst a replacement is found and relationship gaps are filled, a policy of approximately £1.5m (three times the annual profit impact) might be appropriate.
Covering Recruitment and Replacement Costs
Executive recruitment fees, training costs, and the salary premium needed to attract a comparable replacement from the market can be substantial. A policy covering two to three years of the key person's total remuneration is a common approach for this risk.
Repaying Business Loans / Bank Guarantees
If the business has bank debt secured on a personal guarantee from a director, the death of that director may give the bank the right to call in the loan or demand new security. Keyman cover equal to the guaranteed debt provides the funds to repay the loan if necessary.
Stabilising the Business During Transition
Investors, suppliers and clients may reduce confidence in a business following the loss of a key person. Having capital available to demonstrate financial stability — to meet obligations, maintain service levels and fund a proper transition — is itself valuable regardless of specific costs.
Critical Illness Keyman Cover
Most keyman policies include or can include a critical illness element. The insured person may survive their illness but be unable to work for an extended period — months or years — creating an ongoing cost to the business (salary continuation, sick pay, inability to replace them until recovery is certain or departure is confirmed).
Critical illness cover typically pays a lump sum on diagnosis of a qualifying condition (heart attack, stroke, cancer, and other specified serious conditions). The definitions vary between insurers and are worth examining carefully.
Combined vs separate policies: some insurers offer "accelerated" critical illness — the critical illness benefit is paid from (and reduces) the life benefit. Others offer "additional" critical illness — the critical illness pays out in full AND the full life benefit also remains available. The latter is more expensive but provides greater protection.
How Much Cover to Take
There is no single correct answer — the sum assured should reflect the specific financial impact of losing the key person. Common approaches:
Multiples of salary: a sum of three to five times the key person's annual total remuneration is a frequently used starting point. It covers recruitment costs and a period of reduced profitability.
Profit multiples: two to five times the key person's estimated annual contribution to profit. For a founder whose loss might eliminate most of the business's profit for two to three years, the sum assured might be significantly larger.
Specific loan amount: if the primary risk is a called-in personal guarantee, the sum assured equals the loan balance.
Combination: many businesses use a combination — a base amount covering profits plus a specific element covering guaranteed liabilities.
Review regularly: the sum assured should be reviewed when the business's revenue or profits change materially, when the key person's role changes, or when new financial guarantees are given.
Tax Treatment of Keyman Insurance
UK Tax Treatment
The UK tax position on keyman insurance depends on the purpose for which the policy is taken out.
Premiums: HMRC guidance (Business Income Manual BIM45525) states that premiums may be deductible as a trading expense if:
- The insurance is for a short-term risk (annual premium basis is standard)
- The insurance is taken out to cover a loss of profits (trading loss)
- The policy is not expected to be assigned to the individual or converted to personal use
- There is no substantial capital element to the policy
If the premiums are deductible for corporation tax, the benefit received by the company is treated as a trading receipt — i.e., it is taxable income of the company. The net effect is that the company has deducted the premiums and received the benefit into taxable profits — which is broadly neutral from a tax efficiency perspective compared to receiving the benefit tax-free with non-deductible premiums.
If premiums are NOT deductible (e.g., the policy has a capital or non-trading element), the benefit may be received tax-free.
HMRC confirmation: for certainty, many businesses obtain confirmation from HMRC of their intended tax treatment at outset. This is good practice for significant policies.
Non-UK Businesses
Tax treatment of keyman insurance differs across jurisdictions. In the UAE, there is currently no corporate tax on most free zone qualifying income, and premium deductibility depends on the specific tax position of the entity. In Cyprus, corporation tax is payable on trading profits and insurance receipts follow standard income recognition principles.
The tax treatment should be verified with a local tax adviser in each jurisdiction where the policy is arranged.
International Keyman Insurance: Practical Considerations
Insuring non-UK residents: most major life and critical illness insurers will underwrite keyman policies on the lives of individuals based outside the UK, though the underwriting terms may differ. The insured person must typically complete medical underwriting, which may require a medical examination.
Currency: policies should be denominated in the currency in which the business loss would be measured. A business primarily in GBP should hold GBP-denominated policies.
Jurisdiction of policy: in multi-entity international structures, the entity taking out the policy should be the entity that bears the economic risk of losing that key person. A UK subsidiary insuring a director who is employed by a Cyprus holding company may not align correctly.
Placement through a UK or international broker: for businesses with complex international structures, working with a specialist commercial insurance broker who has access to international underwriters is advisable. Standard retail life insurance platforms may not be appropriate for large or internationally complex policies.
Common Mistakes to Avoid
- Underinsuring: taking a nominal policy without calculating the actual financial risk
- Not reviewing the policy: the business grows, the key person's contribution increases, but the sum assured stays at the original amount
- No tax analysis at outset: failing to confirm the intended tax treatment before the first premium is paid
- Confusing keyman and shareholder protection: a business that only has keyman cover has not protected the ownership transition risk, and vice versa
- Letting policies lapse: policies that have lapsed when the triggering event occurs provide no protection
- Not coordinating with the business's overall risk management: keyman insurance should sit alongside business interruption insurance, shareholder protection and a business continuity plan
How Global Investments Can Help
Global Investments has over 32 years of experience advising internationally mobile business owners and high-net-worth individuals on financial planning and wealth protection. We take a comprehensive view of business risk: keyman insurance, shareholder protection, director remuneration and succession planning should form part of an integrated strategy, not be considered in isolation.
We work with specialist commercial insurance brokers and tax advisers to help clients identify key person risks, quantify them correctly, arrange appropriate cover through quality insurers, and structure policies in a way that achieves the intended tax treatment.
Contact us to discuss your business's key person risks in confidence.
Frequently Asked Questions
Who is a key person for insurance purposes?
A key person is an individual whose loss — through death or critical illness — would materially and adversely affect the financial performance of the business. This typically includes the owner/director in a small business, a specialist with unique technical skills, a client-facing professional who holds major client relationships, or a key salesperson whose departure would significantly reduce revenue. The test is economic: would the business suffer a measurable financial loss without this person?
Who pays the premiums on a keyman policy?
The company pays the premiums. This is what distinguishes keyman insurance from personal life insurance — it is the company that is insured against the financial risk, not the individual's family. The benefit is paid to the company on the key person's death or qualifying illness, not to the individual or their estate.
Is keyman insurance tax-deductible in the UK?
HMRC's approach is that keyman insurance premiums are generally allowable as a corporation tax deduction if: (1) the relationship between the insured and the company is that of employer/employee; (2) the insurance is taken out to meet a loss of profit rather than a capital loss; and (3) the policy is not expected to be assigned to the employee or converted to a personal policy. If the premiums are deductible, the benefit payment received by the company is generally treated as taxable income. Always confirm the specific tax treatment with a tax adviser.
What is the difference between keyman insurance and shareholder protection?
Keyman insurance is company-owned cover protecting the business against loss of a critical employee. The benefit goes to the company. Shareholder protection is cover enabling surviving shareholders to buy out the deceased's shares — the benefit funds a share purchase. Both can be needed simultaneously in an owner-managed business: keyman cover for the business continuity risk, and shareholder protection for the ownership transition.
Does keyman insurance work for international businesses with remote key people?
Yes — key person insurance can be arranged for individuals based outside the UK. The insurer needs to assess risk (including the individual's country of residence, medical history and occupation) and the policy terms may reflect higher risk in some locations. International underwriting is standard for major life and critical illness insurers, though terms may differ from a purely domestic policy.
This guide is for general information only and does not constitute financial advice or a personal recommendation. The value of investments can fall as well as rise and you may get back less than you invest. Tax rules, pension legislation, and investment regulations change — always verify current rules and seek advice from a qualified independent financial adviser before making any financial decisions.