What is business life insurance and what type of cover do I need?

How would your business cope if you or a crucial staff member were out of action?

The serious illness or death of a key player can severely disrupt your activities.

A smart director plans for the worst to ensure that the loss of one person – whether temporarily or permanently – doesn’t result in the loss of the business.

There are various forms of business life insurance that can help you prevent a crisis.

Why does a business need life insurance?

Business life insurance can protect a business against a loss of profits resulting from a key person dying or becoming incapacitated.

For instance, it may pay out a lump sum that can be used to cover the costs of hiring cover or a replacement, or simply to offset a resulting loss of revenue.

Having such insurance in place can also boost confidence among your funders.

If an investor or lending bank believes that the success of the business is largely due to one (or a few) individuals within it, then they will almost certainly insist that there is insurance in place to cover those individuals.

What types of business life insurance are there?

Key person insurance

Probably the most well-known type of business life insurance is key person insurance.

Quite simply this helps you protect your business if a particularly important member of staff (or the boss) becomes ill or dies.

Key person insurance can be particularly important for small businesses, as there often isn’t anyone else who could immediately take over that person’s responsibilities.

The lump sum can provide a safety net and a breathing space in which to find a replacement.

Ownership protection

Ownership protection takes a few different forms.

This kind of insurance ensures that if a business partner or shareholder dies, those in the business have the opportunity to purchase their share of the company.

If there is no ownership protection in place, a deceased person’s assets (including any shares they own) usually go to their loved ones, which can cause serious complications.

Business protection insurance

You can take out business protection insurance to cover any loans that the business may have.

For example, if a person named on the policy dies or becomes incapacitated, it can pay out a lump sum to cover any outstanding business loans (provided these loans are covered by the policy).

Life cover for your employees

Life cover for employees has a different purposes, but still a valuable one.

This attractive employee benefit reassures your people that their loved ones will have a financial safety net if they die or become terminally ill while working for you.

Some life cover policies can be claimed as a business expense rather than a ‘benefit-in-kind’ which would make them exempt from income tax.

What counts as a ‘key person’ in a business?

A key person is either the owner of the business, or a member of staff (usually very senior) without whom the business would struggle to achieve its goals successfully.

A key person is also someone who would be hard to replace at short notice.

It isn't just that they are highly skilled or qualified, but that they also have a unique understanding of the business and a feel for it, which a replacement – however well qualified – probably wouldn't have.

The benefits of insuring key people

As a business owner, you need to plan for emergencies as well as for your business goals.

Small businesses are particularly vulnerable to the loss of important team members, since they will simultaneously lose that person’s practical skills, vision, drive and creativity as well as their day-to-day efforts.

And even though the person themselves may not be replaceable, the payout from key person insurance can cushion the shock of their departure so that the rest of the team can rally round.

Is business life insurance tax deductible?

Specific insurance policies like relevant life insurance and key person insurance can qualify as tax-deductible business expenses.

If you own a limited company or are self-employed, you can deduct eligible insurance costs through your annual tax return.

This allows you to reduce your overall tax liability related to your business income.

Can I pay for business life insurance through my business?

Yes, you can purchase and pay for business life insurance through your company.

Paying via your business can provide significant cost savings compared to personally-owned policies.

With a relevant life insurance policy paid by the business, you can claim corporation tax relief and waive National Insurance payments for the insured employee.

This tax-efficient setup could save your company thousands of pounds versus other arrangements.

How to decide what business life insurance you need

The right kind of life insurance for your business will depend on how many key people you have and their relative contributions to the business.

A financial adviser can help you find the most suitable products.