Updated: February 17, 2020

What Type of Key Person Insurance Should I Get?

Want to know which type of Key Person Insurance is right for your company? Read on to find out which one would suit your business best

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: February 17, 2020

Not all key person insurance policies are the same. They can be tailored towards the needs of the business in question and come in several shapes and sizes.

In this article, you’ll learn about the different types of key man insurance that are available and come away with a better idea about which one your firm needs.

What types of key person protection insurance are available?

Most key person insurance policies offer either life insurance or life insurance combined with critical illness cover for the business that’s taking them out. It is designed to offset the financial impact of the death (or diagnosis of a critical illness) of a – as the name implies – key person.

Cover that is solely life insurance-based protects the firm against financial losses it might suffer if a key member of staff was to die while in their employ. Policies that include a critical illness cover element also protect the business against specific serious illnesses.

In addition to policies that encompass life insurance and critical illness cover, it is possible to find key person insurance packages that include the following…

  • Term life insurance
  • Income protection
  • Disability insurance
  • Cover for self-employed workers

Whether you should opt for a policy that offers broader cover beyond life insurance will depend on your company’s needs and circumstances. Make an enquiry to speak with a financial advisor if you’re unsure what level of protection your firm needs.

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Key man insurance with critical illness cover

These plans pay out a cash lump sum to the business if the insured employee dies. Some policies include “terminal illness benefit” where it will pay out upon diagnosis of a terminal illness if the person is given less than 12 months to live, during the course of the term. Not all key person insurance policies include critical illness cover.

Adding a critical illness cover element to the mix will give your business wider protection, covering the firm if the insured employee was to suffer a serious illness or medical issue – such as cancer, a heart attack or a stroke – or any other serious illness listed in the terms of the policy.

Will it cost more?

Yes. While a key person insurance plan with critical illness cover provides an extra layer of protection for your firm, it is likely to drive up the cost.

As a rough guide, policies with critical illness included can cost up to five times more per month for the same individual compared to key person plans that are limited to life cover only.

Since the risk of an employee falling critically ill is generally higher than the risk of them dying, many firms opt to include critical illness cover for extra peace of mind. Although this means more expensive premiums, finding a favourable deal is certainly possible.

Other factors will affect the cost of the policy, such as the length and level of the cover, as well as personal factors related to the person you’re insuring.

For instance, if they’re under 40 years old and in a good state of health, the premiums will likely be lower than they would be for somebody in their 60s with a pre-existing health condition.

A big factor that determines the cost of critical illness cover, is the number of conditions covered. Don’t be lured in if you find a policy that has premiums much lower than all the other providers as the chances are it may be a significantly less comprehensive policy.

If you’re looking for a key person policy with critical illness included, it pays to speak to a whole-of-market insurance broker. They can take all of the factors we’ve discussed into account and help your business find the most cost-effective deal that meets its needs.

Key man cover with term life insurance

Some key person insurance products function like term life insurance policies, the main difference between them and other plans being that the protection is over a shorter period.

The main benefit of short term key man life insurance is that the premiums are usually cheaper compared to longer policies, but most experts will tell you to think twice before agreeing to the shortest term available.

Any protection your business takes out on a key member of staff might have to be renewed if the employee is still working at the firm when the term ends, and this could mean paying more due to them being older.

The term length your company should choose will come down to how long the person you’re insuring will be business-critical and how much you’re willing to pay in premiums.

Key person insurance with income protection

Income protection-based key person insurance is less common than policies which pay out a lump sum, but some insurers offer it. These agreements entitle your firm to regular monthly income if the insured employee suffers a serious illness or dies during the term.

These policies can offer sick pay entitlement or cover the wages of a temporary replacement if your key member of staff is off work for an extended period.

The amount an executive income protection plan pays out each month will depend on the agreed level of cover. This is usually based on a multiple of the insured person’s salary, a percentage of the company’s profits that can be attributed to the key person, or a loan repayment that can be attributed to the insured employee.

If you’re unsure whether your business would benefit more from executive income protection or a lump sum-based policy, make an enquiry and the advisors we work with will carry out a thorough assessment of your business protection needs. With their whole-of-market access they will be able to find the right cover at the most competitive price.

Key man disability insurance

Key person disability income insurance isn’t a product in its own right, but there are many key person policies out there that can protect your business against the risk of an important staff member being unable to work due to long-term disability that occurs during the term.

This could either be in the form of a lump sum payment or regular monthly income to tide the company over until a replacement is found.

Not all types of disability will be included in your key person insurance plan, so be sure to look over the list of exemptions before signing on the dotted line. If your business needs a plan with specific types of disability included, make an enquiry and the experts we work with will compile a bespoke list of the best products that fit your requirements.

Key person insurance for self-employed staff

It is possible to take out a key person insurance policy on somebody who works for your company in a self-employed capacity. If the role they play at the company is vital to its revenue and operating performance or there’d be a financial impact if they died, they will likely be insurable.

Most insurers won’t approach the deal any differently based on the key person being self-employed. You’d typically be offered a lump-sum agreement that functions either like a life insurance plan or a combined life insurance and critical illness cover policy.

It may also be possible to take out an income protection-based key man insurance plan on a self-employed worker, which would give your firm regular monthly payments if the insured person dies or is unable to work due to an illness or disability included in the policy.

If you’re looking for key man insurance for a self-employed person, the experts we work with will help you find the most suitable product.

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There are several types of key person insurance to choose from and many terms and conditions to negotiate with the provider once you’ve selected a policy. The advisors we work with can help you find the perfect plan for your business, based on its needs.

They will make sure you have all of the cover you need at the most cost-effective price.

Make an enquiry or call 0808 189 0463 and we’ll book you in for a free, no-obligation chat with an independent financial advisor who specialises in key person insurance.

Ask a quick question

We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in key person insurance. Ask us a question and we'll get the best expert to help.

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Richard Angliss

Richard Angliss

Finance Expert

About the author

Richard Angliss has made a career in financial services which stretches over 40 years.

His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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