Relevant Life Cover vs. Key Person Insurance: Which Does Your Business Need?
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Relevant Life Cover vs. Key Person Insurance:
Which Does Your Business Need?
When you run a limited company, protecting your business and your family requires strategic planning. Two of the most common, and most frequently confused, policies are Relevant Life Cover and Key Person Insurance.
While both involve life insurance paid for by the business, they serve entirely different purposes and protect entirely different beneficiaries. Understanding the distinction is vital to ensuring you don’t leave your family exposed or your business vulnerable.
Feature | Relevant Life Cover | Key Person Insurance |
Who is protected? | The individual’s family | The business |
Who receives the payout? | Beneficiaries via a trust | The company |
Primary purpose | Death-in-service benefit | Business continuity |
Tax treatment | Premiums are usually corporation tax deductible; not a P11D benefit | May be tax-deductible if covering loss of trading income |
Best for | Directors protecting their family | SMEs protecting revenue and operations |
Relevant Life Cover: Protecting Your Family
Relevant Life Insurance is a tax-efficient death-in-service benefit designed to protect the individual’s family. The company takes out a policy on the life of an employee or director and pays the premiums. If the insured person passes away, the policy pays a tax-free lump sum into a discretionary trust, which is then distributed to the individual’s family or financial dependents.
The primary advantage is tax efficiency. Premiums are usually classed as an allowable business expense for Corporation Tax, and they are not treated as a benefit-in-kind, meaning neither the employer nor the employee pays National Insurance or Income Tax on the premiums.
Key Person Insurance: Protecting Your Business
Key Person Insurance is designed to protect the business itself from the financial shock of losing a crucial team member. The business takes out a policy on the life of an essential employee, such as a founder, top salesperson, or lead developer. If that key person dies or suffers a critical illness, the policy pays a lump sum directly to the business.
The funds can be used to replace lost revenue, recruit and train a replacement, or pay off outstanding business loans. Research from Legal & General shows that 59% of SMEs would cease trading within 12 months of losing a key person, yet only 12% of businesses have this cover in place.
Do You Need Both?
In many cases, yes. If you are the primary revenue generator for your company and the main breadwinner for your family, you need both. Relevant Life Cover ensures your family can pay the mortgage and maintain their lifestyle, while Key Person Insurance ensures your business doesn’t collapse, protecting your employees’ jobs and your company’s legacy.
It is also worth considering Shareholder Protection if you co-own your business, ensuring that the surviving shareholders can buy back shares without dispute or financial strain.
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FAQs
Can my business pay for both Relevant Life and Key Person Insurance?
Yes. A limited company can pay the premiums for both policies. Relevant Life premiums are generally tax-deductible and not a benefit-in-kind. Key Person premiums may also be tax-deductible if the policy is used solely to cover loss of trading income.
Read our Contractor Financial Glossary.
What happens to Relevant Life cover if I close my limited company?
If you close your company, you can usually transfer the Relevant Life policy into your own name to continue the cover as a personal policy, or transfer it to a new employer if they agree to take over the premiums.
Who owns a Key Person Insurance policy?
The business owns the policy, pays the premiums, and receives the payout directly if a claim is made.
Read our Contractor Financial Glossary.
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