What’s the best insurance for self-employed business owners?
Relevant life insurance, executive income protection and key person insurance are the three policies self-employed limited company owners weigh up, and the one thing that decides it is who the money is for: your family, you, or the business. Before any of that, though, how you trade matters, because two of these three are only available if you are an employee of your own limited company.
The short answer
Three policies, and the difference is where the claim cheque lands.
Relevant life insurance
A tax efficient, single life death in service policy that your limited company sets up and pays for on your life as an employee or salaried director. It pays a lump sum to your family, usually through a discretionary trust, if you die or are diagnosed with a terminal illness during the policy term.
Executive income protection
A policy your company owns and pays for, which pays a monthly benefit to the company if you are unable to work through illness or injury. The company then passes it to you through payroll in the normal way.
Key person insurance
A policy the business owns on the life or health of someone the business cannot easily replace, which might be you, a co-director or a senior employee. The payout goes to the business, not the family, to cover lost profits, recruitment costs and the gap while things stabilise.
The destination of the claim cheque. Relevant life pays your family. Executive income protection replaces your earnings. Key person insurance protects the company’s profits. They answer three different questions, so for many directors this is less about picking one and more about the order you buy them in.
If you trade as a sole trader or an equity partner, neither relevant life nor executive income protection is available to you, because both need an employer and employee relationship and you are not employing yourself. Personal income protection with life insurance held in trust is usually the closer equivalent. Key person insurance may still be available to some partnership structures.
Side-by-side comparison
No winners marked, because these are not competing for the same job. Read across to see which one answers the question you are actually asking.
| Comparison point | Relevant life insurance | Executive income protection | Key person insurance |
|---|---|---|---|
| Who can have it | Employees and salaried directors only, not sole traders or equity partners. | Employees and salaried directors only, not sole traders or equity partners. | Any business insuring someone it depends on, including some partnership structures. |
| Who pays | The company. | The company. | The company. |
| Who receives the payout | Your family, usually via a discretionary trust. | The company, then you via PAYE. | The business. |
| What it protects against | Death or terminal illness during the term. | Long-term illness or injury stopping you working. | The financial hit to the business of losing a key individual. |
| Premium tax treatment | Usually an allowable business expense and usually not a P11D benefit, subject to HMRC’s wholly and exclusively test. | Usually an allowable business expense, subject to the same test. | Often allowable, but frequently disallowed where the insured is a significant shareholder or the purpose is capital. |
| Pension allowances | Usually does not use up pension allowances, unlike some registered death in service arrangements. | Not relevant. | Not relevant. |
| When it pays | On death or terminal diagnosis. | After a chosen deferred period, often 4, 13 or 26 weeks. | On the insured event, subject to policy terms. |
| Complexity to set up | Low to moderate, needs the right trust wording. | Moderate, needs benefit levels and deferred period matched to your pay structure. | Moderate to high, needs a defensible valuation of the individual to the business. |
| Who it suits | Directors with a mortgage, dependants or both. | Directors who are the main earner and have no meaningful sick pay. | Businesses where one person drives most of the revenue or holds critical relationships. |
General comparison only. Tax treatment depends on individual circumstances and on legislation, both of which can change. Allowability of premiums is not automatic and can be a matter for your local HMRC inspector, so ask your accountant to confirm the position in writing. Cover is subject to underwriting and acceptance.
Which is right for you?
- You take a salary from your own limited company and your family would need a lump sum if you died
- You have a mortgage, school fees or other commitments that would not disappear with you
- You have already used a good chunk of your pension allowances and want cover that usually sits outside them
- You have personal life cover you are paying for out of taxed income and would rather the company fund it
- You are the only person on the payroll and a group death in service scheme is not open to you
- You want cover funded through the business, which is usually more tax efficient than paying for a personal policy out of income you have already been taxed on
- Your partner’s income alone would not keep the household running
- You are the main or only earner in your household, and the money stops if you stop
- You have no contractual sick pay beyond the statutory minimum, and possibly none at all
- Your savings would cover a few months of bills at most
- Your work is physical, or your health history makes a long absence a realistic prospect
- You pay yourself a low salary and high dividends, and want cover that reflects your total remuneration rather than just the salary line
- The company would still need to cover premises, staff and loan payments while you were signed off
- One person, possibly you, is behind most of the sales, technical delivery or client relationships
- Losing that person would put a bank covenant, funding round or major contract at risk
- You employ people whose wages would still need paying during a long disruption
- Your business has grown fast and now depends on knowledge nobody else has written down
- A lender or investor has asked what happens to the business if you are not there
- Recruiting a replacement would take months and cost more than the role currently pays
Real-world scenarios
The examples below are illustrative only. They are not quotes, recommendations or predictions of cost or outcome. Actual premiums and payouts depend on your age, health, occupation, cover level and the insurer’s terms.
The salaried director with a young family
Priya, 38, is a director of her own consultancy. She takes £12,570 in salary plus dividends, has a £280,000 mortgage and two children under ten. Her business banks around £90,000 a year in profit and she has no life cover at all.
Read the full scenario
A relevant life policy of £400,000 over 20 years, arranged and paid for by the company and written into a discretionary trust, would usually be the stronger starting point.
The premiums would typically be an allowable business expense, and the payout would usually reach her family free of income tax.
- Salary£12,570
- Mortgage£280,000
- Cover£400,000
The sole director with no sick pay
Marcus, 45, runs a small building firm through a limited company and is the only person who quotes and supervises jobs. He draws the equivalent of £60,000 a year across salary and dividends.
Read the full scenario
If he broke an ankle and could not get on site for six months, statutory sick pay from his own company would be worth £123.25 a week, and the company would be funding it out of revenue he is no longer generating.
Executive income protection with a monthly benefit of around £3,000 and a 13 week deferred period would usually be the priority here, with the premium paid by the company and the benefit taxed as income when it reaches him.
- Remuneration£60,000
- SSP a week£123.25
- Monthly benefitAround £3,000
The switch case, a sole trader who incorporates
Elena has traded as a sole trader graphic designer for six years with a personal income protection policy in place. She incorporates, puts herself on the payroll at £15,000 plus dividends, and takes on two employees, one of whom now brings in roughly 40 per cent of new business.
Read the full scenario
Two things change. She becomes eligible for relevant life and executive income protection, which may be more cost efficient than funding cover personally, although moving an existing policy means new underwriting and she may be better off keeping cover she was accepted for years ago on better health.
She also now has a key person exposure she did not have before, in the shape of the employee driving new business.
- Salary£15,000
- EmployeesTwo
- New business from oneAround 40%
Get a key person quote →
The rule of thumb
Executive income protection replaces your earnings, relevant life replaces you as a provider, and key person insurance replaces what you contributed to the business.
Each policy is designed to protect against risk in a specific way, which is why the question is usually the order you buy them in rather than which one to pick.
Frequently asked questions
Can I get relevant life insurance if I am self-employed?
What is the best insurance for a self-employed business owner with no employees?
Is business insurance tax deductible for the self-employed?
How much sick pay do I get if I am self-employed?
Do I need life insurance or income protection first?
How many self-employed people in the UK have this kind of cover?
You might be interested in
Not sure which order to buy them in?
Speak to a business protection specialist at IGotCover. We will look at how you trade, what you draw and who depends on you, then size each policy and compare our panel of insurers. Free, and with no obligation.
Important information: This guide is for general information purposes only and does not constitute financial, legal, or tax advice. Tax treatment depends on individual circumstances and may change in the future. All figures and scenarios are illustrative only and do not represent a guarantee of cover, premium, or payout. Eligibility for cover is subject to insurer underwriting criteria and acceptance. You should seek advice from a qualified financial adviser and, where relevant, a solicitor or tax adviser before taking out any policy or entering into a legal agreement. Insurance provider benefits are subject to change. IGotCover is a trading name of Caspian Assured Ltd, authorised and regulated by the Financial Conduct Authority (FCA reference [FRN]).
