Business life insurance is similar to personal policies in that you pay a monthly or annual premium and in the event that the insured person should die, a cash lump sum is paid out. However, who that benefit is paid to and how it will be taxed will vary greatly, depending on the type of policy you choose.

You can categorise business life insurance policies into two primary camps:

  • Company Life Insurance - a policy that pays the benefit to the business or shareholders.
  • Employee Life Insurance - a policy that pays the benefit to the beneficiary’s loved ones.

What is company life insurance?

Company life insurance, often called Business Protection Insurance, provides businesses with cover in the event that a key employee, shareholder or director should die or become diagnosed with a terminal illness. Unlike employee life insurance, company policies pay a cash lump sum to the business or its shareholders, not the family of the deceased. The two primary types of business protection insurance we provide are keyman insurance and shareholder protection insurance.

Keyman Insurance

Keyman Insurance is a type of business protection that pays a cash lump sum to a company if a key employee or director should die. Who is key to a business's operations will differ from company to company, but invariably it will be a person (or people) whose loss would result in significant financial difficulty for the company. As with other types of life insurance, you're able to take out critical illness cover with your keyman policy, so that you're also protected should the insured be diagnosed with a serious illness. Businesses will use the proceeds of keyman policies for a number of things, such as reducing the impact of a loss of profits, repaying outstanding loans, making up for the loss of knowledge and much more. We find that it's often smaller businesses with influential founders or directors which derive the most benefit from keyman policies; after all, knowledge and relationships in small businesses tend to be shared amongst fewer people.

Shareholder Protection Insurance

Shareholder Protection Insurance is subtly different from keyman insurance in that, rather than providing cover for the loss of an active employee of the business, you're protecting the company from the loss of a shareholder who may or may not play an active role in the day-to-day operations. This type of business protection insurance has been created to facilitate better succession planning, helping the company or other shareholders to buy back the shares of the deceased and ensure the shares don't end up in the hands of someone else who may or may not have an interest in the business. Similarly to other types of life insurance, you're able to take out critical illness cover as well to give you an extra layer of protection in the event that the shareholder in question becomes too unwell to work. This allows the sick shareholder to sell their shares at an agreed price back to the company, which uses the insurance money to purchase them.

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Life insurance for employees

Businesses will often want to provide their team with a death in service benefit and, depending on the size of the company, you'll typically choose from one of two options:

Businesses with fewer than 5 employees

Small businesses that would like to provide a death in service benefit to their employees, or even tax-efficient life cover to one or more directors, will usually need a Relevant Life Insurance policy (sometimes called Directors' Life Insurance). This type of insurance is the perfect way to provide your team with the same level of protection as a group scheme, albeit designed for smaller businesses. They are especially useful for directors of micro-businesses, such as contractors, as they provide a tax-efficient way of getting cover via your limited company. 

Companies with 5 or more staff

For larger companies looking to provide a death in service benefit to their team, a group life insurance scheme is usually the way to go. A group life policy will typically provide coverage to individuals based on a multiple of their salary and will give them protection up to their state pension age. Premiums for group policies are viewed as a tax-deductible expense by HMRC and in the event that a claim arises, the benefit (cash payment) will be paid to the deceased's loved ones.

Business life insurance

How does business life insurance work?

Depending on the type of policy you've taken out, the way it will work will vary. In this section, we explain how the four most popular policy types work.

How does relevant life insurance work?

Relevant life insurance is owned and paid for by the company but provides the employee or director with life cover. Although the company pays the premiums, in the event the insured individual should die, the benefit will be paid to their loved ones, usually via a trust to minimise tax implications. Here's how it works:

  1. The employer insures one or more employees
  2. The policy is written into trust to minimise tax liabilities
  3. Premiums can be fixed until the expected retirement age of the employee
  4. The employee dies or is diagnosed with a terminal illness
  5. The insurer pays the proceeds of the policy to the trustees
  6. The trustees pay the beneficiaries

While the process of writing the policy into trust may seem daunting, it's actually a simple process that will be taken care of by your insurer when you set up your policy.

How does Group Life Insurance work?

Group life insurance provides employees with a death in service benefit, under which a cash lump sum will be paid to the employee's family in the event of their death whilst working for the company. Here's how it works:

  1. The employer creates a policy for 5 or more employees
  2. Premiums are reviewed annually and based on the age of the employees insured
  3. The employee dies or is diagnosed with a terminal illness
  4. The company makes a claim on the policy
  5. The insurer pays a lump sum benefit to the deceased's loved ones

How does keyman insurance work?

Keyman insurance is a type of business protection that is paid for, owned by and to the benefit of the company. Unlike relevant life insurance and group life insurance, in the event that the person that is insured on a keyman policy should die, the insurer will pay out a lump sum to the company, not the employee's family. Here's how it works:

  1. A company identifies an individual who is crucial to the success of the business
  2. The company sets up a keyman Insurance policy
  3. The insured individual dies or is diagnosed with a terminal illness
  4. The insurer pays a lump sum to the company
Business life insurance explained

How does shareholder protection insurance work?

Shareholder protection insurance provides protection if a company shareholder should die, and is designed to help facilitate simpler succession planning. This type of policy can be a little complicated depending on your business and how you wish to structure things, so we'd always recommend speaking to an expert. Here's how it works:

  1. A company sets up a shareholder protection policy and a "cross option agreement"
  2. A shareholder dies or is diagnosed with a terminal illness
  3. The insurer pays out a lump sum to the company or remaining shareholders
  4. Under the terms of the cross option agreement, the remaining shareholders have the option to buy the shares from the deceased's beneficiaries
  5. Equally, the deceased's beneficiaries have the option to sell their shares to the remaining shareholders
  6. The shares are likely purchased at a pre-agreed rate using the proceeds of the insurance policy

About Business Protection Hub

We're specialists in business protection insurance, working with hundreds of companies each year to provide them with policies that protect them should the worst happen. The service we provide is completely free and, alongside our partner brokers, we can provide you with advice on all of the types of business protection insurance.