Business life insurance

While many businesses take out business contents insurance or public liability, few think to insure their staff. Business life insurance does just that – it protects your business financially if something should happen to your staff, your partners or you. We look at what’s included and how your business might benefit from it.

What is business life insurance used for?

There are several types of business life insurance, each protecting different aspects of the business. We’ve detailed each type below, but some examples are key person insurance (which protects key members of staff in your business), business protection (which covers existing debts) and ownership protection (which supports you if something happens to your partner).

Do you need business life insurance?

Business life insurance is not a legal requirement, but it can be a good idea, especially for smaller business owners and directors. What would happen to your business if you weren’t around anymore? And how would your loved ones cope with the financial impact?

If you have less than five employees, business life insurance can be a way of offering death in service benefits. It can also protect your interest in case your partner passes away, you lose a key member of staff or a vital part of your supply chain goes under.

Types of business life insurance

There are five main types of business life insurance:

• Key person insurance. Also known as keyman insurance, this policy protects the most vital members of your staff. Whether that’s the founders, the office manager, your top salesperson or the tech expert, your business gets a payout if they die or become unable to perform their duties. You can use the payout to stay afloat, cover a loan or cover the costs of finding a replacement for the lost staff member.
• Relevant life insurance. If you have less than five employees, you’re unlikely to be able to offer some benefits, such as death in service. Relevant life insurance is an alternative, potentially tax efficient way of offering a group life insurance scheme. This can give your employees and their families peace of mind, knowing they will be looked after should the worst happen. It can also be a good way of recruiting top talent since it’s a valuable employee benefit. Relevant life insurance policies pay out if the person insured dies or if they become critically ill.
• Business protection insurance. Sometimes called business loan protection, this policy can cover different types of debt – from director’s loans, commercial loans and mortgages to venture capital loans, overdrafts, credit cards and even personal guarantees. This provides protection against unpredictable financial blows, such as an important supplier going bust or a loan needing to be paid off at short notice. The payout goes directly to the business and can be taken out to cover employees and business owners with the amount of cover reflecting the amount of debt.
• Ownership protection. If you have a business partner or shareholders, you’d want to protect your business in case they die. As their assets would go to their dependants, whose interests may not align with yours, this can have a negative effect on you and your business. Ownership protection means that if a business partner or shareholder dies, the remaining colleagues have the opportunity to buy up their proportion of the company. There are several types of ownership protection, including shareholder protection, company share purchase protection, partnership protection and limited liability protection. Each controlling shareholder or partner takes out a policy that reflects the value of their shares, and a plan would need to be drawn up reflecting how the shares should be valued and who gets the option to buy them (usually remaining staff members, with the option to sell for the dependants of the deceased).
• Employee benefits. If you have more than five employees, you can arrange for group life insurance, usually in the form of death in service benefits. This means the family of an employee will receive a lump sum if the employee dies. This can provide peace of mind for employees as well as be a way of attracting top talent to your team.

Is business life insurance a business expense?

That depends on the policy and how the payout from it is used. If the payout goes back into the business as profit, then the policy is not tax deductible. If it counts as capital, then premiums can be declared as an expense.

For policies that cover an employee, the relationship between the employee and the business has to be that of employer and employee only. For shareholders, they must have a holding of less than 5% in the business. If you’re unsure how this affects your business, the best thing to do is to contact the HMRC directly.

The tax treatment of any payout is also unclear. Generally, if you received tax relief on the premiums, then the payout will be taxed. This is because it will be used to boost your profits, which will push up your corporation tax liability. If you did not receive tax relief on the premiums, then the likelihood is the payout will be treated as capital and not business profits and so won’t be taxable. Check with the HMRC if you’re unsure how your business is affected.

How to get the best business life insurance

The best business life insurance for your company will depend on your personal circumstances and what type of cover you’re after.

However, there are a few steps you can take to help you find the best cover for you:

1. Who do you need to cover? Consider who in your company you would like to take out cover for. Do you have a business partner or shareholders and want to take out ownership protection? Do you want to protect yourself in case you lose a key member of staff? Or do you want to protect your employees with a death in service benefit or similar? You can take out more than one type of business life insurance policy if you’d like to include several of those elements.
2. How much cover do you need? Consider your share in the company, your monthly outgoings and the number of employees you have. If you’re taking out key person insurance, you’ll need to figure out how much profit they bring into the business and calculate the level of cover that way. You can see some examples in our guide to key person insurance.
3. Compare policies. Shop around and compare business life insurance policies from different providers. Rates and benefits vary by insurer as well as by the type of policy you choose. Remember that not all insurance companies are on comparison sites, so use a combination of sources for your search.
4. Get advice if you need it. Business life insurance isn’t the most straightforward type of cover, so if you aren’t sure what you’re doing, you can get advice. Most policies can be bought from specialist brokers who can help, although you may pay more for this service. Before you buy, always make sure you know all the costs involved. You can also contact the HMRC for advice on business life insurance in terms of tax efficiency.

Pros and cons

Bottom line

Business life insurance can be a valuable protection for you and your business in many scenarios, including when a key member of staff, a shareholder or a business partner dies. It can sometimes mean the difference between your business staying afloat and failing, and it can prevent you from losing control of the company.

Some types of business life insurance also benefit your employees by providing them peace of mind that their loved ones will be well looked after should something happen to them. This can help you attract good staff members to your business.

You will have to fork out for the monthly premiums, and business life insurance policies are not all tax efficient, so weigh up the pros and cons with your personal circumstances in mind.

Frequently asked questions

• Can I pay life insurance through my business?

  Yes. With business life insurance, your business is the beneficiary of the policy and so also usually pays the premiums for the cover.

• Do small business owners need life insurance?

  This isn’t a legal requirement, though investors might ask for this in order to protect their interests. Some lenders may also insist you take out a policy in order to obtain a loan from them.

  On a personal level, consider how your family will cope if you die and your business fails. Would they be able to manage without the income from it?

• What happens to your life insurance when you leave a company?

  If your life insurance is arranged through your employer as part of employee benefits (such as key person insurance, death in service, relevant life cover or shareholder protection), then it will expire when you leave the company or no longer hold an interest in it.