Your business doesn't stop. Even if they do.

Working out who your key people actually are

Forget job titles for a moment and ask a blunter question. If this person did not come back on Monday, what would it cost us?

That usually surfaces two or three names, and they are not always the obvious ones.

• Whoever the customers ring. Relationships often sit with one person, and they do not transfer neatly.
• Whoever knows how it works. The person who understands the system, the process, or the client's history that nobody has written down.
• Whoever brings in the work. If one person wins the majority of new business, the pipeline is personal to them.
• Whoever the bank lent to. If a loan or lease was granted on the strength of one individual, their absence is a financial event whatever else happens.

In a small business, that list usually includes you. Owners insure the stock, the van and the laptop, and then leave themselves off the list entirely.

What the money is actually for

A payout is not a windfall, it is breathing space. Businesses typically use it for:

• Keeping the lights on while revenue dips during the gap
• Recruitment, including the realistic cost of a headhunter and a notice period
• Training and handover for whoever picks the work up
• Repaying a loan, particularly where the lender's confidence rested on the person who has gone
• Reassuring customers and suppliers that the business is stable enough to carry on, because they will be wondering

That last one gets overlooked. News travels, and the firms you work with will quietly wonder whether you will still be here next year. Being visibly able to carry on answers the question before it is asked.

How much cover, and for how long

There is no single formula, and anyone offering you one without asking about the business is selling rather than advising. Common approaches include a multiple of the person's salary, a multiple of the profit they generate, or the outstanding balance of borrowing that depends on them.

What matters more is the thinking behind the number. How long would it realistically take to replace them? What would revenue do in the meantime? What is already in reserve?

On term, the usual anchors are how long that person expects to be with the business, and how long any loan has left to run. Cover that outlives its purpose is just a cost, and cover that ends three years before the loan does is a problem waiting to happen.

Death only, or critical illness too?

Cover can pay out on death alone, or on death and a qualifying critical illness.

The illness version is worth thinking about, because the business impact can be similar while the costs are higher. The person is still on the payroll, perhaps for months, while someone else does the work. Including critical illness increases the premium, so it is a judgement about which risk would hurt the business more.

Getting the ownership right

Key person cover is usually owned by the business, paid for by the business, and paid out to the business. That is the distinction from a relevant life plan, which is company-paid life cover that goes to the person's family instead.

Plenty of directors need both, and they do different jobs. One keeps the company trading, the other looks after the household.

How the premiums and any payout are treated for tax depends on the type of policy and who benefits from it. HMRC's approach is not the same for every arrangement and it can change, so your accountant should confirm the position for your business. I will set the policy up correctly and put the questions in front of them.

Where it sits alongside your other cover

Key person insurance replaces money the business loses. It does not deal with who owns the shares afterwards, which is what shareholder protection is for, and it does not protect a director's own income while they are off work, which is executive income protection.

The business protection page sets out all four covers and how they fit together.