Key Person & Business Insurance
The coverages a company actually needs, and how each one is sized.
Key person cover protects the company, not the family
The business owns the policy, pays the premium and receives the proceeds. It exists to fund the disruption of losing someone the company depends on: recruitment, lost revenue, and reassurance for lenders. Lenders and investors frequently require it before funding a business built around one or two people.
Sizing it honestly
A common approach is several years of the person's contribution to profit, plus the cost of finding and onboarding a replacement, plus any loan the lender requires covered. Insurable interest must exist and be documented, or the policy can be challenged.
Claims-made against occurrence
An occurrence policy responds to incidents that happened while it was in force, whenever reported. A claims-made policy responds only to claims reported during the period. Letting a claims-made policy lapse can leave completed work uncovered, which is what tail coverage exists to solve.
Business interruption is usually the underinsured part
Physical damage cover repairs the building. Business interruption replaces the income lost while it is unusable. Companies routinely insure the first properly and the second by guesswork, and discover the gap only when trading stops.
Aggregate limits and where cover runs out
Most commercial policies carry both a per-claim limit and an annual aggregate. A single large claim, or a run of moderate ones, can exhaust the aggregate and leave the rest of the year effectively uninsured. Excess and umbrella layers exist to extend that ceiling cheaply.
Common questions
Are key person premiums deductible?
Generally not, and the proceeds are typically received tax-free. Confirm the treatment for your entity type.
What limits should a small business carry?
Enough to cover the largest realistic claim rather than the average one, since the average claim is not what ends a company.