Relevant life or key person insurance: which does your business need?

Few directors deliberately ignore risk. It just builds quietly over time. The business grows, revenue becomes concentrated, and one or two people become central to how everything works. Meanwhile, personal cover often sits to one side, paid privately and seldom reviewed.

That's often when directors start comparing relevant life and key person insurance. The products aren't alike, but the risks they deal with start to overlap in practice. They tackle different problems, yet those problems frequently exist within the same business.

How relevant life insurance works

Relevant life insurance lets a limited company provide life cover for a director or employee. The company pays the premiums, and the benefit goes to the individual's beneficiaries.

Its structure is what makes it valuable. In most cases, premiums are treated as an allowable business expense and paid before corporation tax. There's no benefit in kind, so the individual faces no extra personal tax. Because the policy is written in trust, the payout usually sits outside the estate, is not subject to inheritance tax, and is typically paid to the family as a tax-free lump sum.

Many directors realise they wanted life cover all along but had been paying for it inefficiently. A typical pattern is taking dividends, paying personal tax and then using what's left for a life policy. That works, but it's seldom the most efficient approach. Relevant life moves the cost into the company.

An example

A director paid through salary and dividends funds a £400,000 personal life policy from their take-home income. The monthly premium is affordable, but it's paid with money that has already been taxed.

The company switches this to a relevant life policy. The business pays the premium directly, which reduces its taxable profit, and there's no benefit in kind. The level of cover stays much the same, but the funding is more efficient.

If the director dies while employed, the payout goes into trust and is paid to the family, not through the business or the estate. It's a small change in structure that can make a noticeable financial difference over time.

For the technical detail, HMRC sets out how these policies are treated under the employment income rules (GOV.UK).

Where key person insurance comes in

Key person insurance is firmly about the business. It protects the company against the financial impact of losing someone vital, such as a director, a leading salesperson or a specialist whose knowledge would be hard to replace.

It isn't designed to protect a family. It's designed to keep the business going.

The policy pays a lump sum to the business if that person dies or, depending on the cover, is diagnosed with a critical illness. The business can use the money however it needs to: replacing lost income, recruiting, paying off debt or simply buying time. How it's used depends on how the business operates.

What this looks like in practice

In many SMEs, revenue isn't spread evenly. One director might generate more than half of all new business, while another manages key supplier relationships or technical oversight.

Advisers reviewing businesses often see the same thing: a profitable company that is vulnerable in particular areas. Losing one of those people suddenly isn't just upsetting; it creates immediate financial pressure.

Key person insurance is designed to help absorb that impact. The Association of British Insurers notes that business protection policies are widely used to support continuity planning in SMEs (ABI).

How directors usually approach it

Very few directors put both in place from the start. Most begin with personal life cover paid privately, then look for a more efficient structure as the business matures, which is often when relevant life comes in.

Key person insurance tends to follow later, often prompted by something specific: a health scare, a tough year, or watching another business struggle after losing someone important. By then, the risk has usually been there for a while. The issue isn't awareness. It's timing.

The real difference

Relevant life insurance addresses personal financial responsibility: how would a director's family manage financially?

Key person insurance addresses business resilience: how would the company cope, both operationally and financially?

They're two sides of the same coin. A business can manage without one, but it's hard to say it's properly protected without either.

Final thoughts

Most SMEs rely on individuals more than they appear to. That reliance doesn't always show in the accounts; it shows in relationships, conversations and decisions.

Relevant life insurance recognises that directors have personal responsibilities outside work and protects them tax-efficiently. Key person insurance recognises that the business itself can be exposed if those same people are lost.

Neither is complicated by itself. The challenge is recognising when you need both. For many directors, the first step isn't choosing between them, but working out where the pressure would really fall if something unexpected happened.