Business life insurance explained

What is business life insurance?

Business life insurance, also called company life insurance, means several kinds of life cover a business takes out or pays for. Key person and business loan cover pay the business; relevant life and death in service pay the employee's family. Shareholder protection funds surviving owners so they can buy a deceased owner's shares. A limited company can pay for a director's own life cover through relevant life, within HMRC's rules. Sole traders and partners usually pay for personal cover themselves.

Types of business life insurance

Match the policy to what you want the payout to pay for.

Sources: HMRC, Legal and General (relevant life and business protection) and MoneyHelper.

Some types allow critical illness cover to be added (Legal and General). Check the illness definitions and any effect on the death benefit.

Which cover fits your business?

Limited company directors

Relevant life may cover you as an employee; key person cover protects the company against losing your work. You can hold personal cover alongside business cover.

Employers covering staff

Relevant life covers eligible employees individually. A group life scheme covers staff under a shared scheme. Check who is included.

Co-owners and shareholders

Shareholder or partnership protection helps surviving owners buy the deceased owner's share. The arrangements need advice from an adviser firm and the business's solicitor or accountant.

Sole traders and partners

Family cover is usually personal. Legal and General excludes sole traders, members of limited liability partnerships and partners in traditional partnerships from relevant life. For directors or the self-employed needing income during illness or injury, income protection is a separate option.

An adviser firm can help work out which type suits the business.

How does tax work?

Premiums are the payments for cover. Tax relief depends on the policy's purpose and terms.

• For key person cover, HMRC's guidance allows deductions only where the sole purpose is to meet lost trading income, not a capital loss. Life cover must be term insurance with no other benefits, lasting no longer than the employee's usefulness to the company. Whole life and endowment premiums are not deductible.
• Where key person premiums are deductible, HMRC treats the payout as income of the employer's trade, so it can be taxed.
• HMRC's purpose test depends on the facts. Cover for a director who is a major shareholder may protect their share value, so relief is not automatic.
• For relevant life, HMRC says exemption from a benefit in kind charge, meaning tax on an employment perk, depends on circumstances. Legal and General says premiums can qualify for corporation tax relief if part of the employee's pay and wholly and exclusively for the business, with no National Insurance on premiums.
• GOV.UK's expenses guidance distinguishes business insurance from personal spending. A sole trader's personal life cover is generally a personal cost; check with HMRC or an accountant.

The outcome depends on how the policy is set up and the business's circumstances. Rules can change. Check with the business's accountant. Tax advice is not regulated by the Financial Conduct Authority.

What are the limits?

• Term cover lasts for a set period and pays nothing if the person outlives it. Cover ends if premiums stop. Reviewable premiums, which the insurer can reassess, can rise.
• Exclusions and policy definitions apply. Price and acceptance depend on the insured person's age, health, smoking and job, and on the insurer.
• Answer the insurer's questions accurately; wrong answers can lead to a refused claim. Consumer insurance law requires reasonable care for personal cover. For cover a business takes out, the duty is to make a fair presentation of the risk before the contract, including disclosing every material circumstance it knows or ought to know.
• MoneyHelper says death in service ends when someone leaves that employer. Check any replacement cover before relying on it.

How Life Adviser can help

Our quote form is for personal cover and asks nothing about your business. It asks who needs cover, just you or you and your partner, smoking or nicotine use in the last 12 months, the amount and length of cover, age and contact details.

If we introduce you to an adviser firm after you send us an enquiry, tell that firm you want business cover and ask whether it can help.

Have your date of birth, smoking history, height and weight ready, along with health conditions and medication. Know how much cover you want and for how long, and have details of existing life cover.

Life Adviser does not itself compare or recommend insurance policies. We may introduce you to one FCA-authorised adviser firm, or one of its appointed representatives. That firm can compare life insurance products and quotes from the insurers available to it and provide any advice or arrange any cover. The range of insurers considered depends on the adviser firm’s panel and may not include the whole market.

Business life insurance FAQs

Can my limited company pay for my life insurance?

Yes, an eligible director on the payroll can have employer paid relevant life cover. Shareholders who are not employees are not eligible for relevant life cover.

Is business life insurance tax deductible?

Relief is possible, but not automatic. Ask your accountant to check the policy before claiming it.

Who gets the payout, the business or my family?

Business protection can provide money for the company or surviving owners. Employee life benefits are intended for family or other named beneficiaries, so check the policy's payment arrangements.

Can sole traders or freelancers get business life insurance?

They can arrange cover for personal needs and discuss business risks with an adviser firm. Being self-employed does not make someone eligible for relevant life.

Does business life insurance cover critical illness?

Some types can include critical illness cover for an extra premium. It pays only for conditions meeting the policy's definitions, so a diagnosis alone may not qualify.

How do relevant life and death in service differ?

Relevant life covers an individual employee; death in service usually covers staff through a group scheme. Both provide money for the employee's family. Death in service stops when employment with that employer ends.