If you run a small business, you’ve probably wondered whether life insurance is something you need. The short answer is yes – in many cases, it can protect your company, your family, and your employees if the unexpected happens. But with several types of policies available, how do you know which one is right for your business?
In this guide, we’ll walk through the different types of business life insurance and help you figure out which is best for your needs as a small business owner.
Why small businesses need life insurance
For small businesses, the death or serious illness of one person can have a significant impact. Whether it’s a founder, director, or top salesperson, losing someone essential to the day-to-day running of the company could result in lost income, cancelled contracts, or even business closure.
Life insurance provides a financial cushion. It allows the business to recover, stay afloat, or buy time to make new arrangements.
The best types of life insurance for small businesses
Different policies are designed to solve various problems. Here’s a breakdown of the most valuable types of life insurance for small business owners in the UK.
1. Key person insurance
What it is: A policy that protects your business if an essential team member dies or is diagnosed with a serious illness.
Best suited for: Founders, directors, or employees whose absence would result in financial strain.
Who benefits: The business receives the payout.
Why it’s useful: Helps cover lost profits, recruitment, or loan repayments.
2. Relevant life insurance
What it is: A tax-efficient way to offer life insurance to directors or employees.
Best for: Owner-directors of small limited companies.
Who benefits: The family of the person insured.
Why it’s useful: The business pays the premiums, but the benefit goes to the family tax-free. It does not constitute a benefit in kind and is typically tax-deductible for the company.
3. Shareholder protection
What it is: Life insurance that allows remaining business partners to buy back shares if a shareholder dies.
Best for: Companies with two or more shareholders.
Who benefits: The surviving shareholders or the business.
Why it’s useful: Prevents shares from passing to a spouse or family member who does not want to run the business.
4. Business loan protection
What it is: Insurance to cover outstanding loans or debts if the person who guaranteed them dies.
Best for: Businesses with directors who have personally guaranteed a loan.
Who benefits: The business or lender.
Why it’s useful: Helps settle business debts and protects personal assets.
How to choose the right policy
Here are a few steps to help you decide what kind of cover your small business needs:
Step 1: Identify who is essential to your business
Ask yourself: Who is the company unable to run without? This could be you, a co-founder, or a key employee.
Step 2: Review your liabilities
Do you have outstanding loans? Are they personally guaranteed? If so, business loan protection might be necessary.
Step 3: Consider ownership structure
If your business has multiple shareholders, you may want shareholder protection to keep control within the company.
Step 4: Think about employee benefits
If you’re looking to offer a perk to yourself or employees, relevant life insurance can be a tax-efficient option.
Step 5: Speak to a specialist
Business protection insurance can be complex. It’s worth seeking advice from one of our IGotCover specialists to ensure the policies are set up correctly, especially when tax rules are involved.
FAQs
Can a small business pay for life insurance for its directors?
Yes. A relevant life policy is a common option that allows the business to pay the premiums while providing tax-free life insurance for a director.
Is key person insurance tax-deductible?
Sometimes. It depends on whether the policy is solely for business benefit. HMRC has strict criteria, so it’s best to check with an adviser or accountant.
Can I have more than one type of business life insurance?
Yes. Many small businesses hold multiple policies to cover different risks. For example, a director might be insured under both key person and relevant life policies.
What happens if the business closes?
If the policy is owned by the business, it will usually end. With relevant life insurance, there may be an option to transfer ownership to the individual if they leave the business or it shuts down.
Final thought
The best life insurance for your small business depends on your structure, your people, and your priorities. For most small businesses, a combination of relevant life and key person insurance offers both personal protection and business continuity. If you have shareholders or business loans, you may need additional policies.
The key is to build a safety net that protects your business from the financial impact of losing a vital person. With the right cover in place, your company can continue to run smoothly, even when life doesn’t go to plan.
Want help choosing the right life insurance for your business? Please speak to one of our business protection specialists today. guide you through the best type of cover based on your business size.
