In a ten-person company, the premises may burn down, the server may fail, the biggest customer may leave – for these there is property, machinery breakdown and credit insurance. The most common fatal risk, however, is not the subject of any of them: that the managing director – who is also the owner, the main salesperson and the contact person for the bank and the accountant – is out of action for months because of an accident or a diagnosis. Orders do not stop, and neither do wages and lease payments; only the decisions and the signatures are missing. As a broker, I see that this risk almost never appears in SME portfolios, even though the insurance market has a tool for it and the company also has a non-insurance answer to it. This article presents the two together: what key person insurance can do, and what only the company itself can arrange.
- Key person insurance is the company's contract on its own key person: the company is the policyholder and the beneficiary, and the payout goes to the company so that the months of absence – a stand-in, lost revenue, loan repayments – can be bridged.
- It typically consists of term life insurance and riders – accidental disability, critical illness, incapacity for work; the insurer pays only for an event named in the contract, and the contract is preceded by medical underwriting.
- It does not replace a continuity plan: without deputisation arrangements, a second signatory and a shareholders' agreement, the money arrives but there is no one to act with it – the two together make up the company's survival kit.
What is key person risk, and why is it different from the others?
A key person is someone whose absence in itself endangers revenue or operations: the owner-managing director, the only engineer with a professional licence, the head chef, the developer who alone knows the system. In a micro-company this is usually one person, and the risk comes from two directions. One is money: the lost personal revenue, the cost of a stand-in, the loans and wages that keep running. The other is legal: under the Hungarian Civil Code (Ptk.), the managing director acts on behalf of a Kft. (limited liability company), and in a single-member company where the member and the managing director are the same person, the company's signing authority can come to a halt for months in the event of their death or incapacity – the business share can be inherited, but the heirs can typically appoint a managing director only after proving their status as heirs – in practice, after the probate proceedings have closed – and until then the bank account and the conclusion of contracts can be blocked. Property insurance is not the answer to this, and neither is directors' and officers' liability insurance: that covers the manager's liability for their decisions, not their absence. The article on continuity thinking prepares you for the days after a loss – key person risk is its human side.
How does key person insurance work?
Key person insurance is not a separate product type but an allocation of roles: the company takes out personal insurance on its own key person in such a way that the company is the policyholder, the key person is the insured person, and the beneficiary is also the company. The payout therefore goes not to the family but to the business's account, and the company uses it for what is most needed: the fee of a stand-in or interim manager, replacing lost revenue, paying the loans and wages, or, as a last resort, an orderly wind-down. Among Hungarian insurers' products, this is typically available as term life insurance, to which riders can be added: disability resulting from accident or illness, critical illnesses (diagnoses listed item by item in the policy conditions, for example heart attack, stroke, malignant tumour), a daily benefit in case of incapacity for work, and a surgery benefit. The scope and the definitions vary from insurer to insurer, so the question is not whether ‘key person insurance exists’ but which event the specific policy conditions pay for, how much they pay and after what waiting period.
Two of its features deserve particular attention. One is underwriting: the contract is preceded by a health declaration and, for larger sums, a medical examination, and the insurer may exclude a pre-existing condition or reject the proposal – which is why key person insurance can be taken out on good terms while there is not yet a pressing reason for it. The other is the insured person's consent: under the life insurance rules of the Ptk., a life insurance policy taken out on another person requires the insured person's written consent, which means it can only be taken out with the key person's knowledge and agreement. And here too, the insurer pays only for what is an insured event under the contract: a long illness that is not on the list, burnout under most policy conditions, and voluntary departure in every case are not insured events – the latter is not covered by any insurance, only by a good contract and a documented process.
How much, and for what?
We do not quote premiums on this site, but the logic of the sum insured can be described. Three questions determine it: how long it would take to replace the key person, how much revenue is tied to them personally, and how large the obligations are – loans, leases, payroll – that keep running even when they are not there. The first gives the fee of a stand-in and the cost of recruitment, the second the contribution margin lost over those months, the third the fixed expenses that the company cannot avoid in any case. With a loan, the bank itself often requires life insurance on the owner – if there already is one, it is worth fitting it into the portfolio as described in the article on lenders' requirements, rather than taking out cover twice. In a company with several owners, key person insurance has a second use as well: funding the buy-out of business shares laid down in the shareholders' agreement, so that the deceased member's heirs receive money and the remaining members keep the company – this is a lawyer's work; the insurance only provides the funds for it.
Taxation: the identity of the beneficiary decides
In the taxation of key person insurance, the watershed is who the beneficiary is. If the company is both the policyholder and the beneficiary, according to expert interpretation no taxable income arises for the insured individual in respect of the premium, because they do not receive the benefit; the premium is a cost for the company, and the sum insured paid to the company is the company's income, the accounting and corporate tax treatment of which must be clarified with the accountant. If, however, the beneficiary is the key person or their relative, the arrangement becomes a fringe benefit, and the premium for the risk insurance is taxed as a ‘certain specified benefit’ (egyes meghatározott juttatás) – this is covered in the article on the taxation of benefits. It is therefore worth keeping the two in separate contracts: the key person cover that protects the company, and the life insurance taken out personally that protects the family. Tax rules change; the specific accounting is a matter for the accountant and, where necessary, a tax adviser.
What insurance does not solve: the continuity kit
The arrival of the money is not the same as the company functioning. If the managing director is the only one who can sign at the bank, who knows the passwords, who deals with the customers, then the payout sits in an account that no one can access. The continuity kit is therefore not an insurance matter but an organisational one, and at least as important: a second person authorised to sign for the company, or a person holding a power of attorney, in the company register extract and at the bank; deputisation arrangements that set out who decides in the manager's absence; documentation of access rights, contracts and key customer relationships; and, in a single-member Kft., a provision thought through with a lawyer on what happens if the member dies. For freelancers and sole traders, the same question arises as protection of their own income – the article on the sole trader's minimum portfolio discusses this as the third layer.
What should you do in practice?
- Write down on one page whose absence would bring the company to a halt, and what would stop: revenue, signatures, know-how, relationships.
- Check the company register extract and the bank signature card: is there a second person who can act in the manager's absence?
- Calculate the three amounts – replacement, lost revenue, fixed obligations – these form the basis of the sum insured.
- Request a quote for term life insurance with riders, with the company as policyholder and beneficiary; in the policy conditions, read the list of critical illnesses and the waiting periods.
- Clarify the tax treatment with your accountant, and keep the protection of the company and that of the family separate.
- Review it once a year: has the key person changed, or the loan, or the revenue? The cover should follow the company.
If the question concerns your own company, the free 20-minute consultation is an opportunity to think through where key person risk stands in your portfolio, and what is worth handling with insurance and what with organisation.
Whose absence would bring your company to a halt? Book a free 20-minute consultation →
Sources
- Bankmonitor – The company's survival may depend on it: life insurance for businesses
- Önadózó – Taxation of corporate term life insurance (expert answer)
- Hungarian Civil Code (Ptk., Act V of 2013) – management of business companies, life insurance contract
- Personal Income Tax Act (Szja tv., Act CXVII of 1995) – insurance taken out by the payer
