Key Person Protection Insurance for Limited Companies — A 2026 Guide

Key person protection insurance is, in 2026, the standard answer for any UK limited company that has one or two people doing a disproportionate share of the work, signing the contracts, holding the bank relationships or personally guaranteeing the borrowing. It exists exactly to deal with the question lenders, investors and co-shareholders all eventually ask: “what happens to this company if the founder is suddenly not here?”

Quick facts for limited-company owners

• Policyholder: the limited company (not the director personally)
• Approval: a board minute is best practice but not legally required
• Premiums: paid from the company bank account
• Tax: deductible if HMRC Anderson tests met — see keyman insurance and corporation tax
• Payout: lump sum to the company on a valid claim
• Often required by lenders and investors as a covenant

Why limited companies need key person protection

The economic reality of small UK limited companies is that one or two people generate most of the value. Companies House data on 2025 incorporations shows the median director count is two; over 70% of new limited companies have only one named significant person. The corporate veil does not protect the business from the operational gap when one of those people is suddenly not there.

Five trigger situations where limited companies put key person cover in place

1. New bank borrowing — lenders want comfort that loans can be repaid if the named director dies. Particularly common with Growth Guarantee Scheme facilities and unsecured business loans.
2. Equity investment — many VC and angel investors require key person cover as a covenant in the shareholders’ agreement.
3. Customer concentration — where a single customer relationship is worth a meaningful percentage of revenue.
4. Critical-skill dependency — where one technical owner has skills that cannot be replaced quickly in the labour market.
5. Personal guarantees — cover the value of the personal guarantee so the company can clear the debt rather than leaving the family exposed.

How a limited company sets up the policy

1. Identify the key person(s) and the business risk.
2. Calculate the sum assured (see how much cover do you need).
3. Pass a board resolution authorising the company to take out the cover.
4. Run a whole-of-market quote via the key person protection quote form.
5. Apply, complete underwriting, set up direct debit, go on cover.

Board approval — what to minute

A short board minute documenting (a) who is being insured, (b) the sum assured, (c) the basis for the calculation, (d) the trading reason for the cover, and (e) authority for the company to enter the contract is best practice. It supports the deductibility argument with HMRC and demonstrates good governance to investors.

Tax treatment for limited companies

Premiums on a properly-structured policy on an employee director are normally a deductible business expense (corporation-tax-relievable). The payout is then taxable as trading income. We cover the HMRC Anderson principles, with worked examples, in Keyman insurance and corporation tax.

Common pitfalls limited companies make

• Insuring a sole or majority shareholder and assuming premiums are deductible — HMRC often disagrees.
• Over-insuring relative to the trading loss — failing the “wholly to compensate trading loss” test.
• Confusing key person protection with shareholder protection — different products, different triggers.
• Letting cover lapse when borrowing is repaid — usually the right answer is to keep cover proportional to ongoing trading risk.

Limited company key person cover and personal guarantees

If a director has personally guaranteed company debt — an overdraft, a commercial mortgage, a GGS facility, an unsecured loan — key person cover lets the business clear the debt on death and release the family from the guarantee. This is one of the strongest reasons most lender-financed SMEs put cover in place.

Related guides

• Key person protection vs keyman insurance
• Key person income protection
• What is keyman insurance?
• Keyman insurance policy explained

Frequently asked questions

Can a limited company take out life insurance on a director?

Yes — via key person protection (also called keyman insurance). The company owns the policy and is paid the lump sum on a valid claim.

Does the director have to consent?

Yes. UK law requires the life assured to sign the application and disclose medical history. Without consent, the policy is invalid.

Are key person protection premiums tax-deductible for limited companies?

Often yes, where HMRC’s Anderson tests are met — cover on an employee, term-only, sum assured wholly to compensate trading loss.

Do banks require key person protection on business loans?

Many do, particularly under the Growth Guarantee Scheme or any facility with a director’s personal guarantee. It is increasingly written in as a loan covenant.

Does the cover survive a change of director?

The policy is on a named individual. If the key person leaves, the cover continues until cancelled, but a new key person needs a new policy.

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