The sum of a company’s success is its people. Specifically, the people you can’t afford to lose. One day, a key employee, maybe a team leader, project manager, or business partner, leaves, falls sick, or passes away unexpectedly. Suddenly, the work grinds to a halt. The whole operation starts to feel fragile. That’s where Key Person Insurance comes in.

What is Key Person Insurance?

At its heart, Key Person Insurance is about protecting your business if you lose someone you simply can’t replace overnight. It’s not like personal life insurance, which is set up to support a family. This cover is taken out by the business itself, on a key employee whose knowledge, contacts, or experience keeps things running smoothly. The business pays the premiums, and if something serious happens, the financial support goes back into the company.

Think of it as breathing room when you need it most. It gives you the funds to steady the ship, bring in a replacement, and deal with any commitments that suddenly become harder to manage. Instead of scrambling to survive, you get time to regroup and make clear decisions under pressure.

Why Businesses (Especially SMEs) Need Key Person Insurance

If you run a small to medium enterprise (SME), the impact of losing a single person can be catastrophic. Large corporations often have departments, backups, and layered talent. SMEs? Not so much. Losing a top salesperson, a lead technician, or a founder can hit your bottom line hard. Here’s why it matters:

• Revenue dependency: Some businesses rely heavily on one person to bring in clients or close deals. Lose that person, and your pipeline dries up.
• Operational disruption: Certain employees hold specialised knowledge, like construction methods, regulatory know-how, or supplier contacts. If they’re gone, projects stall.
• Investor reassurance: Investors want to know the business isn’t entirely tied to a single individual. Key Person Insurance gives them that confidence.
• Loan approvals: Banks and lenders sometimes require key-person coverage before approving business loans, especially if a particular person is integral to repayment plans.

The bottom line? Key Person Insurance is all about guaranteeing stability and peace of mind. 

How Key Person Insurance Actually Works (in Practice)

The business identifies a “key person”, someone whose absence would materially impact profits. The company buys a policy on that individual, paying the premiums. The payout is structured in various ways, depending on the policy and needs:

• Lump sum payout: For covering immediate financial shocks, such as lost revenue, hiring temporary staff, or paying off urgent debts.
• Income replacement: Some policies provide regular payments to offset lost profit until the business gets back on its feet.
• Recruitment and training: Finding and training a replacement can be costly. Insurance proceeds can cover those costs.

It’s not complicated, but it is precise. You need to calculate the real financial impact of losing that person. Think revenue, client relationships, and the time and cost of recruitment. A poorly valued policy isn’t much help when the pressure’s on.

Is Key Person Insurance Tax Deductible? 

Generally, no. Premiums for Key Person Insurance are not tax-deductible as a business expense if the business is the beneficiary. 

If the policy is structured to provide employee benefits, such as a supplemental death benefit, there may be limited circumstances under which part of it could be deductible. However, for standard Key Person coverage, deductibility is typically not an option. 

When Should a Business Consider Key Person Insurance? (Situations & Red Flags)

Not every employee needs a policy. You don’t insure the receptionist or the junior admin, unless they happen to handle something unusually critical. Consider coverage for individuals who:

• Drive a significant portion of revenue
• Hold specialised technical knowledge
• Maintain unique client relationships
• They are founders or executive-level leaders
• They are indispensable for regulatory compliance or operational processes

Red flags to watch for:

• Overreliance on a single person for sales or contracts
• Business performance is tightly tied to an individual’s skill set
• Succession plans that are weak or nonexistent
• Investor or lender pressure to secure continuity

If any of these apply, you should be thinking about Key Person Insurance.

Protect Your Business Today with Key Person Insurance

At the end of the day, Key Person Insurance isn’t about paranoia. Every business has vulnerabilities, and the loss of a key employee is one of the most expensive. A well-structured policy buys time; time to adjust, recruit, and keep clients happy without letting one event tank the company.

Morgan Insurance Brokers ensures your business can safeguard its essential team members with coverage that goes beyond standard policies. Reach out to us today for more information.