If you run a limited company, you may have wondered whether it’s worth setting up life insurance for your directors. After all, directors play a vital role in how the business operates day-to-day. But is life insurance a personal expense, a business one, or something in between?
In this blog, we’ll explain why limited companies might need life insurance for directors, the different types of cover available, and how the tax works.
Why would a limited company need life insurance for its directors?
Limited companies are legally separate from their directors. However, in reality, the death of a director can cause significant disruption, particularly in small businesses.
There are three main reasons a limited company might set up life insurance for a director:
1. To protect the business
If a director’s death would impact revenue, contracts, or daily operations, the company may consider purchasing key person insurance. This pays a lump sum to the business if the insured director dies or becomes critically ill.
2. To support their family
The company can set up a relevant life policy – a tax-efficient way for businesses to offer life cover to directors or employees. The benefit is paid to the director’s family, but the company covers the premiums.
3. To repay business debts
If a director personally guaranteed a loan, the business may need life insurance to cover that debt. This is known as business loan protection.
What types of life insurance can a company take out for directors?
Here are the main types of cover that limited companies might use:
Key person insurance
- Paid for and owned by the business
- Protects the company financially
- Covers loss of profit, recruitment costs, or business continuity
- Payout goes to the company
Relevant life insurance
- Paid for by the business
- Benefit paid tax-free to the director’s family
- Doesn’t count as a benefit in kind
- Can be claimed as a business expense for tax purposes
Shareholder protection
- Ensures the remaining shareholders can buy the deceased director’s shares
- Stops shares passing to family members who may not want to run the business
- Often used alongside a cross-option agreement
Is life insurance a business expense for directors?
| Type of cover | Tax-deductible? | Benefit paid to |
| Key person insurance | Sometimes (if completely for business purposes) | The business |
| Relevant life insurance | Yes | The director’s family (via a trust) |
| Shareholder protection | Usually not | Co-owners or the business |
| Personal life insurance | No | The individual’s family |
Relevant life insurance is often the most tax-efficient option for directors, particularly in smaller businesses that lack group schemes.
Life insurance for directors of limited companies if the director is also a shareholder?
If a director owns a share of the business, the situation becomes more complex. You may need to consider both the operational impact (key person cover) and the ownership impact (shareholder protection) of their death.
In this case, it’s worth seeking tailored advice to ensure the right mix of policies is in place.
FAQs
Is relevant life insurance only for directors?
No. It can be used for any employee or salaried director, but it’s most popular with directors of small businesses who want personal life cover paid through the company.
Can a company pay for personal life insurance?
A company can pay the premiums, but it would usually be treated as a benefit in kind, which means tax and National Insurance may apply. Relevant life insurance avoids this.
What happens to the policy if the director leaves?
With relevant life insurance, the policy can sometimes be transferred to the individual if they leave the company. With key person cover, the policy typically ends when the person leaves.
Is critical illness included?
Relevant life insurance cannot include critical illness cover. For that, a separate policy would need to be arranged.
Final thought
A limited company may not need life insurance for its directors, but in many cases, it makes good financial sense. Whether it’s to protect the business, repay debts, or provide for a director’s family, the right policy can offer peace of mind and financial security.
From key person insurance to relevant life plans, there are several ways for companies to structure life cover, and some come with significant tax advantages.
If you’d like help understanding your options, our team can guide you through the best type of cover based on your business size.
