The business protection mistake 45% of SME owners make
Business protection covers the financial measures and insurance policies a company puts in place to safeguard its operations, owners and key staff against unexpected events like severe illness, critical injury or death. This article explains five of them: relevant life insurance, key person insurance, shareholder protection, business loan protection and executive income protection. The one difference that dictates which you need is simple. Ask what the money is actually replacing when someone dies or falls seriously ill, whether that is a person’s family benefit, lost profit, someone’s shares, a debt, or an owner’s sick pay, because each cover answers one of those questions.
The short answer
Five covers, and each one replaces something different.
- Relevant life insuranceA death in service style life policy that your company takes out and pays for on the life of an individual employee or director, with the payout going to their family through a trust. It is typically tax efficient for the company and the individual when set up correctly, though tax treatment always depends on your circumstances.
- Key person insurancePays a lump sum to the business if a key individual dies or, if chosen, becomes critically ill, so the company can cope with lost profit, recruitment costs and disruption while it recovers.
- Shareholder protectionGives the surviving owners the money to buy a deceased or critically ill shareholder’s stake, so control stays inside the business rather than passing to a family member who may not want to be involved. It usually works alongside a cross option agreement, which gives the survivors and the estate matching options to buy and sell the shares.
- Business loan protectionRepays an outstanding overdraft, loan, commercial mortgage or director’s loan if the person behind it dies or, if chosen, becomes critically ill, so the debt does not fall on the business or on personal guarantors.
- Executive income protectionA company owned policy that pays a monthly benefit if a director or key employee cannot work through illness or injury, replacing a chunk of their income while they are off.
Relevant life protects a family, key person protects profit, shareholder protection buys shares, business loan protection clears debt, and executive income protection replaces income during illness.
So what does seeking advice about business protection actually involve? It is a short, structured conversation about what would break if a named person was suddenly gone, who owns the shares, what debt exists and who has guaranteed it, and how long the business could keep paying the bills. An adviser then sizes the risk and shows the options. The reason 45 per cent never having done this matters is that the covers only work if they are set up in advance and structured correctly, with the right ownership, trusts and agreements. You cannot arrange them after the event, and getting the structure wrong can change who receives the money and how it is taxed.
Side-by-side comparison
The same nine questions asked of each cover. The tick marks each cover’s strongest point, rather than a winner, because these are not alternatives to one another.
Relevant life insurance
- What it protects
- An individual’s family on death or terminal illness.
- Who owns and pays
- The company owns and pays.
- Who receives the payout
- The employee’s family, via a discretionary trust.
- Tax treatment of premiums
- Usually an allowable business expense, and normally not a P11D benefit in kind when set up correctly.Strongest on premium tax
- Tax treatment of payout
- Usually paid tax free to the family via trust, within the lump sum and death benefit allowance of £1,073,100 for the 2026 to 2027 tax year.
- Eligibility
- Employees and salaried directors, typically to age 75. Not available to true sole traders with no employees.
- Complexity to arrange
- Low to moderate. A single life policy plus a trust.
- Who it suits
- Directors and small teams wanting death in service style cover without a group scheme.
- Without it
- The family relies on personal life cover only, and any company death in service benefit is lost.
Key person insurance
- What it protects
- Business profit and continuity.
- Who owns and pays
- The company owns and pays.
- Who receives the payout
- The business.
- Tax treatment of premiums
- May be allowable if the Anderson principles are met, but not automatic, and it can be a matter for the local inspector.
- Tax treatment of payout
- Usually a taxable trading receipt where premiums were allowed.
- Eligibility
- Any business with an individual whose loss would hit profit.Widest applicability
- Complexity to arrange
- Low to moderate.
- Who it suits
- Businesses reliant on one or two revenue driving individuals.
- Without it
- The business absorbs lost profit, recruitment and disruption costs from cash flow.
Shareholder protection
- What it protects
- Ownership and control.
- Who owns and pays
- Usually each shareholder, often via trust, or the company.
- Who receives the payout
- Surviving shareholders, or the company, to buy the shares.
- Tax treatment of premiums
- Usually not allowable for the company where it benefits shareholders.
- Tax treatment of payout
- Usually structured to be received tax free by the beneficiaries when set up under trust.Strongest on payout tax
- Eligibility
- Companies and partnerships with two or more owners.
- Complexity to arrange
- Higher. Needs a valuation, trusts and a cross option agreement.
- Who it suits
- Multi owner companies and partnerships that want control to stay in house.
- Without it
- Shares can pass to a family member or an outsider, and survivors may lack the funds to buy them back.
Business loan protection
- What it protects
- A specific debt.
- Who owns and pays
- The company owns and pays, or the individual under trust.
- Who receives the payout
- The business, or the lender directly.
- Tax treatment of premiums
- Broadly follows the key person rules. Allowability is not automatic and depends on purpose.
- Tax treatment of payout
- Usually taxable if premiums were allowed, mirroring key person treatment.
- Eligibility
- Any business with a loan, overdraft, commercial mortgage or director’s loan.
- Complexity to arrange
- Low, and often the simplest to size because it matches the debt.Simplest to size
- Who it suits
- Businesses and directors with borrowing or personal guarantees.
- Without it
- The debt can fall on the business, on the estate, or on personal guarantors.
Executive income protection
- What it protects
- An individual’s income during illness or injury.
- Who owns and pays
- The company owns and pays.
- Who receives the payout
- The company, which pays the employee through PAYE.
- Tax treatment of premiums
- Usually an allowable business expense, and typically not a P11D benefit.
- Tax treatment of payout
- A trading receipt to the company, then taxed as income when paid on to the employee.
- Eligibility
- Directors and employees, and cover can take account of salary, dividends and benefits.Widest earnings basis
- Complexity to arrange
- Moderate. Needs a deferred period and definitions chosen.
- Who it suits
- Directors whose income is mostly dividends and who have little sick pay.
- Without it
- The owner falls back on statutory sick pay of £123.25 a week for 2026/27, or on personal savings.
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. Trust arrangements and cross option agreements should be reviewed with a suitably qualified adviser. Cover is subject to underwriting and acceptance.
Which is right for you?
- You are a director paying yourself through a low salary and dividends and want life cover paid for by the company
- You run a small team that is too small for a group death in service scheme
- You want a family payout that usually sits outside your pension allowances
- You are a higher earner who wants cover that does not create a personal tax charge when set up correctly
- Your profit depends heavily on one or two people, such as an owner, a top salesperson or a technical lead
- You would face real recruitment and lost income costs if that person was gone for months
- A lender or investor has asked what happens to the business if a named individual dies
- You could not easily or quickly replace a specific person’s skills or relationships
- You own the business with one or more other people
- You would not want a co-owner’s shares to pass to their family or an outsider
- You want certainty that the survivors can afford to buy those shares
- You have never written down what happens to shares on a shareholder’s death
- The business has a loan, overdraft, commercial mortgage or a director’s loan account
- You or a co-owner has signed a personal guarantee that puts your home or savings at risk
- The debt is tied to a specific individual whose loss would trigger repayment worries
- You want the debt cleared without dipping into trading cash or personal assets
- Most of your income comes as dividends, which many standard sick pay arrangements and personal policies ignore
- Your company has little or no sick pay budget beyond statutory sick pay
- You are a director or key employee who could be off work for a long period through illness
- You want the premiums paid by the company rather than from taxed personal income
If you are a genuine sole trader with no employees and no co-owners, most of these company owned covers will not fit, and you are likely to need personal protection instead. Our sister brand Caspian Insurance handles personal protection for that situation.
Real-world scenarios
Illustrative examples only. Businesses, valuations and figures are invented, and are not quotes, recommendations or predictions of cost or outcome.
A clear key person case
A design agency of eight people relies on one founder who brings in most of the new business. If she died, the directors estimate it would take a year to rebuild the pipeline and cost around £250,000 in lost gross profit and recruitment.
Read the full scenario
Key person insurance sized to that figure could give the business a lump sum to keep paying salaries and buy time.
The risk here is lost profit rather than shares or debt, so none of the other four covers answers it.
- TeamEight people
- Profit at risk£250,000
- Time to rebuildAbout a year
Get a key person quote →
A clear shareholder protection case
Two brothers own a plumbing company 50/50, valued at around £600,000. Neither wants to end up in business with the other’s spouse.
Read the full scenario
With shareholder protection and a cross option agreement, if one dies the other has roughly £300,000 to buy the 50 per cent stake from the estate at a fair value, and control stays with the surviving brother.
- ValuationAround £600,000
- Split50/50
- Buy outAround £300,000
Get a shareholder protection quote →
An edge case that switches
A single director consultancy owner pays himself a £12,500 salary and around £87,500 in dividends. He first asks about key person insurance, but he has no co-owners and no staff, so the real risk is his own income if he cannot work.
Read the full scenario
A personal income protection policy would only look at his small salary, giving a benefit of roughly £625 a month, which is far too little.
Executive income protection can instead cover up to around 60 to 70 per cent of his total remuneration including dividends, which on £100,000 would be in the region of £5,000 to £5,833 a month.
- Total remuneration£100,000
- Personal policyAround £625 a month
- Executive cover£5,000 to £5,833 a month
Get an executive income protection quote →
The rule of thumb
Business protection exists because these things have already happened to other people’s companies. Debt that outlived the owner, a serious illness that lasted a year, shares that went to the wrong person.
Each has a policy attached to it, and the only real mistake is going another year without finding out which ones apply to you.
Frequently asked questions
What is business protection for a small business?
Do I really need business protection if I have never sought advice?
Is key person insurance tax deductible?
What is the difference between relevant life and key person insurance?
How much executive income protection can a director get?
What happens to my business loan if I die?
You might be interested in
Which of the five applies to you?
Speak to a business protection specialist at IGotCover. We will work through what would break if a named person was gone, who owns the shares, what debt exists and who has guaranteed it, then size the cover 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]).
