Business life insurance for company owners
Four different policies doing four different jobs. We will tell you which two you actually need, and which you can skip.
Business life insurance is not one product. It is a family of policies that do four different jobs: replacing the profit lost when a key person dies, buying out a shareholder’s family, clearing outstanding business loans, and giving directors personal life cover paid for by the company. Getting the right one is mostly a question of working out which of those four problems you actually have. This page walks through each type of business life insurance, what it costs, and whether it is an allowable business expense.
What is business life insurance?
Business life insurance is a life insurance policy owned or paid for by a company rather than an individual, arranged to protect the business or its owners from the financial impact of a death. The business pays the premium, and depending on the policy type the lump sum goes either to the company itself or to the individual’s family.
That is the whole difference from personal life insurance. Personal cover replaces income for a household. Business protection insurance protects the trading entity: it keeps the bank calm, keeps the shares in the right hands and keeps the doors open while the business absorbs the loss. Most owner-managed firms need both, and a good deal of the confusion in this market comes from treating them as alternatives.
Types of business life insurance
There are four main types of business life insurance, and they are not interchangeable.
Key person insurance
Pays the company when a key employee dies or becomes critically ill, covering lost profit and the cost of replacing them.
Shareholder protection
Funds the purchase of a deceased owner’s share of the business so the surviving owners keep control.
Business loan protection
Clears outstanding business loans, overdrafts and director’s loan accounts, discharging personal guarantees.
Relevant life insurance
Gives one employee or director a personal death-in-service benefit funded by the company.
Alongside those sits group life insurance, a registered group life scheme covering a whole workforce rather than named individuals. Larger employers usually run group life insurance schemes for staff and use the named policies above for the people at the top. Which combination is right for your business depends on size, structure and who the business would struggle to replace.
Relevant life insurance: personal cover, paid for by the company
Relevant life insurance is the one most small business owners have never heard of and most should have. It is a relevant life insurance policy the company takes out on a single member of staff — commonly a director — with the benefit paid into a discretionary trust for that employee’s family. It is a cost-effective way to provide life cover, because the company pays the premiums out of pre-tax profit rather than the director paying from taxed income.
It is normally treated as an allowable business expense, usually attracts no benefit-in-kind charge, and the payout does not count towards the pension lifetime allowance. Limited companies with between one and a handful of directors are the natural fit. Sole traders cannot take out a relevant life policy on themselves, because there is no employer and employee relationship to write it under.
Key person insurance: cover for the people the business depends on
Ask yourself who, if they died tomorrow, would cost you contracts, clients or the ability to deliver. That person is your key person. Key person insurance is a policy owned by and paid to the company, designed to pay out a lump sum that covers lost profit, recruitment costs and the cost of keeping things going while you replace them.
Key person protection is often written with critical illness cover attached, since the financial impact of losing a key person to serious illness for a year is frequently worse than losing them permanently — the salary continues while the revenue does not. Cover is usually set as a multiple of the individual’s contribution to gross profit, or as a straightforward replacement-cost figure. Keyman insurance is the same thing under an older name.
Shareholder protection and business loan protection
If you have a business partner, ask what happens to their share of the business when they die. Without shareholder protection, the shares pass to their family, who may want cash you do not have, or may want a seat at the table you did not plan for. A policy on each shareholder, paired with a cross-option agreement, funds the surviving owners to buy those shares at a fair price and maintain control of the business.
Business loan protection does the same job for debt. Banks routinely take personal guarantees from directors on business loans, and those guarantees survive death. A policy sized to the outstanding debts clears them on a claim, so the lender is paid, the guarantee is discharged and the family is not chased for money the business borrowed. The same logic applies to business partnership arrangements and limited liability partnerships, where partnership agreements need to line up with the policies.
Is business life insurance an allowable business expense?
Sometimes — and the answer depends on which policy you are asking about. Relevant life premiums are generally claimed as a business expense and allowed against corporation tax. Group life insurance premiums usually are too. Key person cover is judged against the Anderson rules: premiums may be classed as a business expense where the policy is short-term, covers an employee rather than a shareholder-director, and the purpose is purely to replace lost profit. Where any of those fails, relief is normally refused — but then the payout is usually received tax-free instead, which is often the better outcome.
Shareholder protection and business loan protection premiums are generally not deductible, because the purpose is capital rather than trading. None of this is a substitute for checking your own position with your accountant, and treatment can change. What we can do is make sure the policy is written the right way round before HMRC ever looks at it.
Can I pay for life insurance through my business?
Yes, and for most company directors you should. Paying personal life insurance premiums from your own bank account means earning the money, paying income tax and national insurance on it, and only then buying cover. Running the equivalent relevant life insurance through the company removes both layers.
Personal life insurance policy
- Paid from income you have already been taxed on
- No corporation tax relief for the company
- Counts against your pension lifetime allowance
- Portable — it follows you if you leave the business
Relevant life insurance policy
- Premiums paid from pre-tax company profit
- Usually an allowable business expense
- Normally no benefit-in-kind charge for the director
- Payout goes to the family via a discretionary trust
For a higher-rate taxpayer the effective saving on the same level of life cover is often around half. What you cannot do is put an ordinary personal policy through the business and call it a business expense. The policy has to be set up as a relevant life plan from outset, with the correct trust in place. Converting an existing personal plan is not possible; you take out a new one and cancel the old.
How much does business life insurance cost?
Premiums turn on age, health, smoker status, the sum assured and the term, exactly as with personal cover. As a rough steer, a healthy forty-year-old non-smoker can expect relevant life cover of £500,000 over twenty years for a modest monthly figure, and key person cover on similar terms to be broadly comparable. Add critical illness and the premium rises substantially, often by two to three times.
Any number you read online is illustrative only. The only figure that matters is the one an insurer puts in writing after underwriting. We compare the whole market — Aviva, Legal & General, Royal London, Vitality, Zurich and the rest — because on business life insurance policies the spread between the cheapest and dearest insurer for the same person is routinely thirty per cent or more.
Business life insurance for sole traders, limited companies and LLPs
The type of business you run changes what is available. Limited companies have the full menu: relevant life, key person, shareholder protection and loan protection. Limited liability partnerships use partnership protection, which works like shareholder protection but is written around the LLP agreement. Sole traders cannot use relevant life, so personal life cover written in trust, plus loan protection for any outstanding business loans, is usually the answer.
The number of employees matters too. Below about five lives, named individual policies are cheaper and simpler. Above ten or fifteen, group life insurance for the wider workforce plus named cover for the key people is normally the better structure for small businesses that are growing.
Which type of business life insurance is right for your business?
Work through it in this order. If the business has debt with a personal guarantee, start with business loan protection — that is the one that follows your family home. If the business has more than one owner, shareholder protection is next, and it needs a cross-option agreement alongside it or the tax treatment falls apart. If losing one individual would materially dent profit, add key person insurance. And if you are a director paying for personal life insurance out of your own pocket, move it to a relevant life policy and take the saving.
Most businesses we see need two of the four, not all of them. We will tell you which two, and we will tell you when the honest answer is that you have enough protection in place already.
Business life insurance, answered
Can business owners get life insurance?
Yes. Business owners can hold personal life cover, company-funded relevant life cover, or both, and the business can separately insure them as a key person or shareholder. Being self-employed or a director is no barrier.
What does Martin Lewis say about life insurance?
The consumer advice you will have seen focuses on personal life insurance: buy it young, write it in trust, and compare rather than accepting the first quote. All three points hold for business cover too, and the trust point matters even more, because the wrong ownership on a business policy can create a tax charge on the payout.
Does business life insurance pay out to the company or the family?
It depends on the policy type. Key person and loan protection pay the company. Shareholder protection pays the surviving owners or a trust. Relevant life insurance pays the employee’s family. Getting the ownership right is the single most important part of setting these up.
What is the difference between key person and relevant life insurance?
Key person cover protects the business against losing an individual and pays the business. Relevant life cover protects the individual’s family and pays them. Same premium payer, completely different beneficiary.
Can I have more than one policy?
Yes, and most business owners end up with several, each doing a distinct job. A director might hold relevant life cover personally, be insured as a key person by the company, and be covered again under a shareholder protection arrangement.
Let us look at the whole picture
Tell us how the business is structured, who it depends on and what it owes. We will map the four types of business life insurance against your actual risks and quote only what earns its place. Speak to your accountant or financial advisers about the tax detail; we will handle the cover.
This page is general information, not a personal recommendation.