How to tailor your life insurance offering to your business

Business life insurance can benefit both you and your team.

Business life insurance is a valuable part of your employee benefits package. It will give their family financial security and can also be used to fund care or adaptations to the family home if they're diagnosed with a terminal illness. Depending on the type of insurance you choose, payments will usually be made into a trust so that it won't be liable for income tax.

As a business owner, you'll know that your business can continue if anything happens to you. Your insurance can provide key person coverage to ensure business continuity, which is reassuring for existing and prospective clients and investors. If you have staff, it demonstrates that you value their well-being, which can help you become an employer of choice.

A business life insurance policy gives you or your employees a lump sum payout when they die. The policy typically pays their family or other named beneficiary a lump sum. It's a valued benefit, showing your team that you value them and want to care for their loved ones when they're no longer here.

Business life insurance pays out if an employee dies during their employment with you. Their death doesn't have to have occurred due to their work. Funds may also be available if they have less than 12 months to live. There are limited circumstances where a policy won't pay out, for example, if the insured person commits suicide.

The payment is a multiple of their salary, typically 2, 3 or 4 times, although some policies offer higher multiples.

There are different types of insurance policies that you can opt for depending on the nature and size of your business, so it's vital you assess your insurance needs before investing in business life insurance.

Your business needs influence the insurance policies you choose. The insurance coverage you need as a sole trader will differ significantly from a small business or corporation. Whether you have employees and how many will also influence the type of insurance available to your business. Here's our round-up of the factors to consider according to the size of your business.

The type of business life insurance suitable for you as a sole trader depends on your business structure, mainly because the tax rules differ. Key person coverage and relevant life insurance may be appropriate depending on your business setup.

Key person insurance

A key person policy covers anyone essential to your business and is suitable for any type or size of business. If you became critically ill with an illness covered by your policy, your payout could allow you to pay someone to run things while you recover. Alternatively, if you have a business will with a succession plan, your executors can use the money to put those provisions into effect.

This type of policy is tax deductible as it's essential to the continued operation of your business, so HMRC classes it as a business expense, whether you have a limited company or have registered with them as a sole trader.

Relevant life cover

Relevant life insurance is only available to limited companies but offers death-in-service benefits that provide a lump sum payout to your family or another nominated beneficiary on death. It works in the same way as an individual life insurance policy, but it's more tax efficient.

Tax considerations

If you're a sole trader without a limited company, your premiums are only tax deductible on a key person policy. You can still take out an individual life insurance policy to ensure your family receive a payout if you die. However, you would need to pay the premium from your personal income after tax.

Business life insurance can be tax-deductible if you have a registered company but don't have enough staff to qualify for a group life insurance policy.

As a small business owner, you could work with a tiny team or have a larger workforce. This means you need to be flexible when considering the right coverage for your business. It's worth considering your goals and your current business needs so your insurance coverage can grow with you.

Key person insurance is vital and helps you spend your budget on coverage where it's needed most. However, there are other options that you can choose depending on the size of your business.

Less than five employees

If your small business has fewer than five employees, you won't qualify for group business life insurance policies typically only available to larger firms. However, you can still offer death-in-service benefits to your workforce without taking out key person insurance.

Relevant life insurance

A relevant life policy suits businesses of all sizes, from a one-person company to multi-million-pound corporations. Premiums tend to be lower than those on group policies, so you may find it's a more economical option even if your business qualifies for a group policy. You can start by covering existing employees and adding new starters as your business grows.

It's also more tax-efficient than taking out individual policies, as the premiums are an allowable business expense. Life insurance also isn't classed as a benefit-in-kind, so you and your employees won't have to pay income tax on the benefit.

5+ employees

A larger workforce gives you more options on your life insurance. Your employee benefits can also attract new talent to increase business growth. Building a reputation as an employer of choice boosts your brand, helping you to attract new customers and retain existing clients in the long term.

You'll likely have a choice over the type of business life insurance you take out. You can still opt for key person or relevant life insurance, but you'll also be eligible for group life insurance. One of the main benefits of group life insurance over relevant coverage is that your employees are unlikely to be asked for details of their medical history when they join.

A relevant life policy can be cheaper, but a new staff member will likely be asked for medical details when they join, which can affect your premium. Group life insurance policies don't generally have any exclusions, but premiums are often higher. If you or your team have a complex medical history, it's worth getting a comparison quote for both types of coverage to assess which option is a better fit for your business.

With a larger workforce, you may also want to offer a broader range of employee benefits, so getting professional advice on the types of insurance you want to include will help you to spend your budget wisely.

A larger business brings greater complexity to your business structure and workforce management. You're more likely to need to deal with stakeholders, including your business partners, the board and your shareholders.

As we've already mentioned, key person coverage can play a vital role. You can also take out a shareholder protection policy. Suppose a business partner or shareholder's share of the business passes to their family when they die. In that case, this policy allows your business to buy it from them, giving them a payout and allowing you to retain control of your business. You and your business partners must seek legal advice to ensure that the company articles and individual wills are structured to allow this.

Relevant life insurance

Opting for a relevant life policy can be more cost-effective than a group plan, and it is currently more tax-efficient for high-net-worth business owners. The pension lifetime allowance currently applies a higher tax rate on pensions and group life policies over £1,073,100. This was abolished on 6 April 2023 but is still relevant for anyone retiring during the coming tax year. Payouts from relevant life policies don't count towards the lifetime allowance, so they are a tax-efficient way of providing additional death-in-service benefits to high earners.

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Group life insurance

A group life insurance policy lets you provide all your employees with life insurance. The premiums can be more expensive than with other types of coverage. However, policies typically don't have medical underwriting, so your employee's medical history won't impact the premium. A group policy can also come with other services that can improve the overall quality of your employee benefits package.

Employee benefits

While life insurance is a valuable benefit, it's important that it forms part of a more comprehensive package if you want to attract the best talent to your business. Consider what perks your team will likely value and whether life and health insurance can provide these. Some group life policies offer pension benefits to your employees' partner or other dependents when they're gone in addition to paying a lump sum.

Well-being services are in increasing demand, and both life insurance and health insurance policies can offer a range of support, including online health information, telephone helplines and well-being apps. Some life insurance policies also include free or discounted legal services, which can provide support through stressful life events.

Your chosen life insurance company may also offer access to grief counselling and bereavement support for your employees' families. Services like these can give your employees additional peace of mind knowing that their loved ones will be looked after emotionally and financially when they're gone.

Business support services

Managing a large workforce can be challenging, but the right cover can provide you with resources to help. Life insurance is a valuable employee benefit that can aid staff recruitment and retention. However, your staff must know what's on offer. Depending on your chosen insurance company, you'll likely have access to resources that help you share information with your team and manage the policy.

Some insurers also offer resources to help managers support their employees' physical and mental health. For example, Aviva provides a line manager toolkit that educates managers on mental health, the signs that an employee may be struggling and ways to adjust their work if necessary.

A range of factors influences the cost of your company's life insurance. When considering the cost per employee, look at areas where insurance may represent a cost saving, for example, by reducing the tax you pay.

The cost will depend on your policy coverage and how much life insurance you want to provide. Life insurance policies pay a multiple of an employee's salary on death, so the higher the multiple, the higher your premium will be. When you renew your policy, your claims history can also be relevant.

Otherwise, here are some factors that will determine the cost of your premium.

Your work

If you work in a high-risk industry, such as construction, your premiums will be higher than if your employees are primarily office based.

The age of your employees

The average age of your employees will impact your premium simply because younger people are less likely to die.

Medical history

Your employees' medical history typically will only be relevant if you have a group policy if you want to provide life insurance that exceeds your insurance company's usual cover limits. However, it can influence the premium on other types of policy.

The number of staff you want to cover

The size of your business impacts the type of insurance available but can also influence the cost. Insuring more people allows your insurance company to spread the risk that someone will claim to reduce the cost per employee.

Get professional advice

Providing the right life cover for your employees involves considering a range of factors, including your plans for business growth and the employee benefits you want to provide. We're specialist brokers who can talk you through the whole process and provide advice tailored to your business.

Contact us for expert advice and a comparison quote.

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