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Business Life Insurance

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Although Life Insurance is designed to pay out a tax free cash benefit should the policyholder die there are a number of different types of Business Life Insurance to consider.

Broadly speaking you can split Company Life Insurance into two types of policy:

  • Employee Life Insurance
    A policy where the claim gets paid to the loved ones of the deceased.
  • Company Life Insurance
    A policy where the claim gets paid back into the business to ensure it has enough funds to deal with the loss of a key member of staff.

Life Insurance for Employees

Businesses with less than 5 employees
Micro businesses who want to provide a Death in Service Benefit to their employees are unlikely to be able to set-up a group scheme as you tend to need 5 or more employees.

The good news is there is a specific policy called Relevant Life Insurance which benefits from the same tax position as Group Life Insurance however it is set-up on a per employee basis.  It is great for contractors who work through their own limited company or businesses who only want to protect 2 or 3 members of staff.

Relevant Life Insurance premiums are tax deductible for the business and should a claim arise it is paid out tax free.

Companies with 5 or more employees
For businesses with at least 5 members of staff you can set-up a group scheme which covers all employees under the same policy with the business paying the premiums.

With a traditional Group Life Insurance policy the level of cover is set as a multiple of the employee’s salary and will protect them up to their state pensionable age.

The premiums the company pays for a Death in Service benefit are tax deductible and should a claim arise the benefit would be paid out tax free to the loved ones of the deceased.

Company Life Insurance

Company Life Insurance is also known as Business Protection Insurance.

There are three main types of Business Protection which would pay a claim to the business to provide stability, continuity and other financial support should a key person or business owner die.

  • Keyman Insurance
    If a key member of staff passes away (or potentially becomes critically ill, if you add optional Critical Illness Cover), this insurance pays out a lump sum into the business to allow for business continuity. Funds can be used for a variety of purposes, from making up for lost profits to paying for the hiring and training of a replacement staff member.
  • Shareholder Protection Insurance
    Provides the business with the capital to re-purchase the deceased shareholder’s shares from their estate, keeping control of the business and compensating the deceased shareholder’s family.
  • Business Loan Insurance
    Protects outstanding business loans, from commercial mortgages to overdrafts. Should an individual key to repaying those loans pass away, the cover pays out a lump sum to the business to clear the outstanding debts.
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Do We Need Business Life Insurance?

Given that Business Life Insurance is split into Life Insurance for employees and Company Life Insurance, the risks involved are very different. This means the question of whether you need Business Life Insurance will depend on your business and the protection you’re looking for.

Life Insurance for Employees

While Life Insurance for employees – whether this be a group Death in Service scheme or individual Relevant Life policies – isn’t compulsory, it’s nonetheless a valuable benefit to provide yourself and your staff.

Many companies start building their employee benefits package with Death in Service Insurance because it’s simple, easy to understand and relatively cheap.

Meanwhile, company directors, especially where they’re the sole employee working through their own limited company, often opt for Relevant Life Insurance for its tax efficiencies and to protect their loved ones cost-effectively given that the business pays the premiums.

Company Life Insurance

For Company Life Insurance, on the other hand, there may be a stipulation from a lender or a venture capital firm that you take out cover to protect the lender’s investment in the business.

Even where there is no stipulation to get this cover, it’s worth noting that, according to Legal & General, 53% of the UK’s small businesses think they would cease trading in less than a year if a key employee died or became critically ill and unable to work. How would your business cope?

What’s the Risk of Passing Away?

Broadly speaking, the risk of passing away is the same whether you’re looking to provide cover for the family or the deceased or the business.

We’ve used the below Life Expectancy Calculator to work out the risk of a healthy male passing away within the next 10 years:

30 Years Old

40 Years Old

50 Years Old

1 in 112

1 in 53

1 in 23

Setting Up Employee Life Insurance

With Death in Service Insurance the company sets up a group policy paying the premiums for the employee who is provided with a level of life insurance, often set at a multiple of their salary (i.e. 4 x Basic Salary).

This will cover them during their tenure at the company or until the normal retirement age of the scheme, whichever comes first.

Group Life Insurance is not typically a P11D or benefit in kind, so the employee doesn’t have to pay any additional tax because they have Death in Service cover.

How Does Death in Service Insurance Work?

1. Business Life Insurance is set up on a Group Life basis
When a business offers Life Insurance to employees, group risk is priced based on workers’ ages, location and industry. The company then pays the appropriate premiums to an insurer. Death in Service premiums are generally a business expense allowable against corporation tax.

2. An employee dies while working for the business
Employees don’t have to be at work when the death occurs – it could happen anywhere, even as a result of an accident / injury abroad or as a result of a serious illness.

3. The business assists the employee’s family with making a Group Life claim
If the claim is accepted, the insurer then moves to pay the benefit.

This sum will be a multiple of the employee’s salary as defined from the outset when the scheme is set-up.

4. The claim is paid into a trust, of which the company is a trustee
Group Life Insurance is written into trust with the business as the trustee. This intermediary step allows the family to sidestep an inheritance tax bill on the cash.

5. The trust pays the benefit to the employee’s family

The Cost of Group Employee Life Insurance

The cost of Death in Service Cover, like any employee benefit, depends on the demographics of your workers.

The vast majority of employees won’t need to go through medical underwriting, so there shouldn’t be increases in relation to smoking and poor health for most employees, for example.

However, despite this, the cost of cover will still depend on the age of the workforce. A workforce with an older average age will typically increase premiums due to increased risk.

Other major factors that will determine the cost of Group Life Cover include:

  • Employees’ salaries
    Given that the benefit is based on a multiple of salary, if you have many high-earning employees you’ll likely face a higher premium
  • Your industry
    Certain industries require employees to take on riskier roles (e.g. manual work, working at heights or underwater) than would be undertaken by the typical desk worker, so premiums will be higher in such industries
  • Number of workers
    While you might think that it would cost more to insure a larger group of people, in fact certain cases insurers will offer a premium discount for groups above a certain size. Check with an adviser to see if you qualify.

How does Relevant Life Insurance Work?

Relevant Life Insurance works in a very similar way to Group Life Insurance/Death in Service cover. However, Group Life Insurance requires a business to have minimum number of employees to be eligible.

The business still pays for Relevant Life Insurance and it’s still an allowable expense against corporation tax, but it’s used as an alternative to Group Life cover for smaller firms.

It’s also used in businesses where the sole employee is the director. However, Relevant Life cover requires an employer/employee relationship so it’s not usually available to sole traders who aren’t employed through their own limited companies.

Why Relevant Life Insurance?

Relevant Life Insurance is particularly attractive for company directors wanting life cover paid for by their business because it’s incredibly tax-efficient when compared to buying a personal policy.

A personal policy is bought with post-tax income, i.e. after income tax and National Insurance has already been deducted. For a director working through their own limited company, the company will also have paid employer National Insurance contributions on their wages.

A Relevant Life policy, on the other hand, is paid by the business and is eligible for full corporation tax relief. It’s also not a P11D/benefit in kind for the employee.

As such, company directors could save up to 50% on life cover when opting for Relevant Life Insurance over a personal policy.

How Much Does Relevant Life Insurance Cost?

To see how much you could save, use our Relevant Life Insurance Calculator and see how these savings could apply to you.

Relevant Life Insurance offers significant tax savings over a company director paying for Life Insurance personally.

This is because the policy is owned and paid for by the business. Premiums are typically an allowable business expense against corporation tax, while there are also savings to be made in terms of National Insurance contributions, also.

Below is an example of the savings possible on Relevant Life Insurance vs a personal plan.

Personal Life Cover
Relevant Life Cover
Cost to Individual
Monthly Premium
£100.00
£0.00
Employee NI Contribution
£3.45
£0.00
Income Tax
£68.97
£0.00
Cost to Business
Premium
£0.00
£100.00
Employer NI Contributions
£23.79
£0.00
Gross Cost
£196.21
£100.000
Corporation Tax
-£37.28
-£19.00
Total Cost
£158.93
£81.00
Total Savings

49.03%

Relevant Life Insurance Calculator

Calculate the tax savings you can make by taking out a company paid Relevant Life Insurance policy instead of a personal Life Insurance policy.

  • £

Setting Up Business Life Insurance

There are three main types of Business Life Insurance each used for a slightly different reason however the underlying policy is very much the same.

Keyman Insurance

In the event of the death of an insured key person (or them suffering a critical illness, if this is included in your policy), Keyman Insurance plan would pay out a lump sum into the company.

The company then has ready cash at hand to use for business continuity purposes, covering situations such as:

  • Loss of profits
  • Recruitment/training fees for a replacement
  • Loss of important personal or business contacts
  • Loss of confidence from suppliers and customers
  • Difficulty in raising finance for new developments.

Shareholder Protection Insurance

Shareholder Protection Insurance is designed to protect a company in the event of the death of a shareholder by paying a cash lump so the surviving shareholders can buy the deceased’s shares and remain in control of the business.

If a shareholder dies, their shares pass as part of their estate to their family. This can be problematic for both the company and the family.

For the company, not only have they lost a shareholder, who is often a key member of staff, but they’ve also lost control of that shareholder’s shares.

The family member(s) who receive the shares on the shareholder’s death may not be qualified to run the business just because they’ve inherited a loved one’s shares.

While the deceased’s shares may have huge value to the company, they could have very little real value to the family in cash terms. This could be problematic if the family needs ready cash to pay an inheritance tax bill or have to cover funeral expenses.

If a deceased shareholder’s dependants are left cash-poor after the shareholder’s death, they may seek to sell the shares to release the capital locked up in them. If the company doesn’t have the money to buy them off the deceased shareholder’s family, the family may sell them to a competitor who does.

Business Loan Insurance

Just as an individual might buy personal Life Insurance to cover a mortgage, Business Loan Insurance provides very similar protection but for companies with outstanding corporate loans.

Sometimes lenders require a company to have Life Insurance in place on certain key members of staff when you take out the loan. This will be to ensure the loan can still be repaid even if the viability of the business is called into question by the death of a key player.

However, even if it’s not mandatory it’s still worth taking out protection, especially if there has been a personal guarantee given for the loan or the business owner(s) used their home as security.

How Much Does Business Life Insurance Cost?

The cost of Business Protection depends largely on the amount of cover you need.

As with all Life Insurance written on individual lives, each person will need to be medically underwritten for Business Protection, which will involve a series of questions such as:

  • Your health and medical conditions
  • Your age
  • Your lifestyle (e.g. smoking and drinking habits)
  • Your job (riskier occupations tend to cost more to insure).

The below table details the monthly cost of Life Insurance Business Protection and Life Insurance and Critical Illness Cover for a healthy non-smoking individual aged 35, 45 and 55.

They’re looking for £150,000 of level cover (i.e. cover that will remain fixed throughout the policy term).

Age
5 Year Policy
10 Year Policy
15 Year Policy
Life Only
Age 35
£6.21
£7.10
£7.88
Age 45
£10.51
£12.66
£13.73
Age 55
£21.40
£26.78
£33.55
Life & Critical Illness Cover
Age 35
£27.51
£32.56
£35.89
Age 45
£59.38
£72.21
£81.25
Age 55
£130.40
£158.57
£179.15
Premiums correct as of February 8th, 2019

Need Business Life Insurance Advice?

As you can see from this brief overview of your Company Life Insurance options, there are a number of policies to choose from each with a very different outcome.

If you need any help ensuring you are looking at the most suitable cover to meet your protection needs please do not hesitate to get in touch.

Why Speak to Us…

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.

  • There is no fee for our service
  • We are independent and impartial
    Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
  • We’ve got bargaining power on our side
    This allows us to negotiate better premiums for you than you going direct yourself.
  • You’ll speak to a dedicated expert from start to finish
    You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
  • Benefit from our 5-star service
    We pride ourselves on providing a 5-star service, as can be seen from our 2335 and growing independent client reviews rating us at 4.92 / 5.
  • Gain the protection of regulated advice
    You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
  • Claims support when you need it the most
    You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.
Victoria Slade Independent Protection Expert at Drewberry

If it is all getting a little confusing and you need some help please do not hesitate to get in touch.

Either pop us a call on 02084327333  or email help@drewberry.co.uk and we can talk through your options.

Victoria Slade
Business Protection Expert at Drewberry

Extremely satisfied with the help and advice from Drew, since the beginning him understood what I was looking for and have the patience to help me out with all my questions and doubts. Didn’t tried to be push or annoying calling me all the time like so many did before. At the end we find the perfect medical policy for me and my daughter that covers everything that we need. I more than recommend them and if in the future I need something else for sure I will contact them again. Giving only 5 stars because I can’t give 6!!!!

Natasha Caversan Mucci
07/06/2019
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