Keyman vs Relevant Life Insurance: Which Does Your Small Business Need? 2026/27
Keyman insurance and relevant life insurance compared for UK small business owners -- purpose, tax treatment of premiums and proceeds, and which structure fits your situation.
Two Different Problems, Two Different Policies
Small business owners often ask whether they need "keyman insurance" without realising that the term covers two genuinely different products that solve different problems: protecting the business itself, or protecting the family of a key individual. Understanding which problem you are actually trying to solve -- and often, whether you need both -- is the starting point before comparing costs or providers.
Keyman (key person) insurance exists to protect the business's own finances. If a director, founder, or critical specialist dies or is diagnosed with a serious illness, the business itself may suffer: lost sales, disrupted client relationships, the cost of recruiting and training a replacement, or a lender calling in a loan that depended on that person's guarantee or expertise. Keyman insurance pays out to the company to cushion this financial shock.
Relevant life insurance exists to protect the individual's family. It is, in effect, a tax-efficient way for a company to provide a death-in-service benefit to a director or employee -- similar to what a large employer's group life assurance scheme offers -- without needing the minimum group size that many group schemes require. The payout goes to the employee's chosen beneficiaries, not to the company.
Who Owns the Policy and Who Benefits?
| Feature | Keyman (key person) insurance | Relevant life insurance |
|---|---|---|
| Policyholder | The business | The business |
| Who pays premiums | The business | The business |
| Who the payout goes to | The business | The employee's family, via discretionary trust |
| Purpose | Protect business profits/finances | Provide a death benefit for the family |
| Typical use case | Losing a director, founder, or key specialist | Director wants family death-in-service cover |
This distinction in beneficiary is the single most important difference and drives almost all the differences in tax treatment described below.
Tax Treatment of Keyman Insurance
HMRC's approach to keyman insurance dates back to long-standing case law (commonly referred to as the Anderson rules), and turns on the purpose of the policy:
For premiums to be tax deductible, broadly:
- The sole purpose of the insurance must be to meet a loss of trading profits, not to protect capital value (for example, safeguarding a shareholding).
- The insured person must be an employee or officer of the company, not someone insured purely in a capital or ownership capacity.
- The term of the policy should reasonably reflect the period the person is expected to remain useful to the business, rather than being a permanent, whole-of-life arrangement.
If these conditions are met, premiums are generally an allowable deduction against Corporation Tax as a trading expense.
The tax trade-off: where premiums have been treated as deductible, any payout received is normally treated as a trading receipt of the business and is subject to Corporation Tax in the year it is received. Where premiums were not deductible -- because the policy was really protecting capital value rather than trading profits -- the proceeds are often treated as a capital receipt instead, which may not attract Corporation Tax, though the precise position depends on the facts and should be confirmed with an accountant before the policy is taken out.
Tax Treatment of Relevant Life Insurance
Relevant life insurance is structured very differently from a tax perspective, and this is precisely why it has become popular with small company directors, including single-director companies that cannot access a traditional group life scheme.
Premiums: the company pays the premiums, and these are generally deductible as a business expense for Corporation Tax purposes in the normal way (subject to the usual wholly and exclusively test that applies to any staff benefit cost).
Benefit in kind: because the policy is written under a discretionary trust for the benefit of the employee's family rather than providing a personal benefit to the employee during their lifetime, HMRC does not treat relevant life premiums as a P11D taxable benefit. This means no additional income tax charge for the director personally, unlike many other benefits a company might provide.
Proceeds: because the policy is written under trust, the payout on death is normally paid directly to the beneficiaries named in the trust, outside of both the company's accounts and the deceased's estate. This means the proceeds are typically free of income tax and, because they sit outside the estate, generally free of inheritance tax too.
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Use the income tax calculator to see how a comparable personal life insurance premium, paid from taxed income, would compare to a company-paid relevant life premium.Comparing the Overall Tax Efficiency
For a company director specifically wanting death-in-service cover for their family, a relevant life policy is usually significantly more tax-efficient than either a personal life insurance policy (paid from taxed and NI'd income) or a keyman policy (which, as set out above, may not even be tax deductible, and pays out to the company rather than the family in any case).
For a business wanting to protect itself financially against losing a key person, keyman insurance is the only one of the two that actually delivers a payout to the company -- a relevant life policy, however well structured, will never compensate the business for its own trading losses, because by design the money goes to the family.
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Open Corporation Tax calculatorWhich Businesses Need Which?
Keyman insurance tends to suit:
- Businesses reliant on one or two individuals for sales, technical delivery, or key client relationships
- Businesses with loans or overdrafts personally guaranteed by a director, where lenders may want key person cover as a condition of lending
- Businesses planning succession or sale, where losing a key person before a transaction completes would materially affect valuation
Relevant life insurance tends to suit:
- Small companies, including single-director companies, wanting a tax-efficient alternative to a personal life insurance policy
- Directors who do not have access to a large employer's group life scheme
- Businesses wanting to offer a competitive benefits package to key staff without triggering a P11D benefit in kind
Can You Have Both?
Yes -- and many owner-managed businesses do exactly this on the same key individual, because the two policies are solving different problems rather than duplicating cover. A keyman policy protects the company's own cashflow and continuity if the founder or a critical specialist is lost, while a relevant life policy, taken out separately on the same person, provides for their family. Because the tax treatment and beneficiaries are entirely different, there is no double-counting or conflict between the two.
The right combination -- and the right sum assured for each -- depends on the specific risks facing your business and the personal protection needs of the individual concerned, so it is worth discussing both options with a protection adviser and your accountant together, rather than assuming one policy can do the job of both.
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Frequently asked questions
What is the main difference between keyman insurance and relevant life insurance?
Keyman (key person) insurance protects the business itself against the financial loss of losing a key individual -- the business is the policyholder and the beneficiary. Relevant life insurance is a death-in-service benefit for an individual employee or director -- the business pays the premiums, but the payout goes to the employee's family, typically via a discretionary trust, not to the business.
Are keyman insurance premiums tax deductible?
Sometimes. HMRC applies tests derived from the 1944 Anderson rules: the policy must be intended to protect trading profits (not capital), be on the life of an employee or officer rather than a shareholder acting in a capital capacity, and be for a term reflecting the person's expected service. If these conditions are met, premiums are usually an allowable deduction against Corporation Tax; if not, they are treated as a capital expense and disallowed.
Are keyman insurance proceeds taxable?
Broadly, where premiums have been treated as tax deductible, any payout is usually treated as a trading receipt and taxed as income of the business in the year received. Where premiums were not deductible (because the policy was for a capital purpose, such as protecting against loss of a shareholder's capital value), proceeds are typically treated as a capital receipt instead, often free of Corporation Tax though this depends on the specific facts.
Are relevant life insurance premiums tax deductible?
Generally yes. Premiums paid by an employer for a relevant life policy are usually deductible as a business expense for Corporation Tax purposes, provided they meet the wholly and exclusively test, in the same way as other staff benefit costs. This is one of the main attractions of relevant life policies for company directors.
Is a relevant life insurance payout taxable to the employee's family?
No, provided the policy is written correctly. Relevant life policy proceeds are normally paid into a discretionary trust and paid out to the employee's chosen beneficiaries free of income tax and, in most cases, free of inheritance tax, because the trust structure keeps the payout outside the deceased's estate.
Does a relevant life policy count as a P11D benefit in kind for the employee?
No. Because the policy is written under trust for the employee's family rather than providing a direct personal benefit to the employee during their lifetime, HMRC does not treat relevant life policy premiums as a taxable benefit in kind, so there is no P11D entry or additional income tax for the employee.
Which type of business typically needs keyman insurance rather than relevant life cover?
Keyman insurance suits businesses that would suffer a direct financial hit -- lost profits, loan default risk, or the cost of finding and training a replacement -- if a key director, salesperson, or technical specialist died or became critically ill. It is about protecting the business's own finances, not providing for the individual's family.
Which type of business typically needs relevant life insurance rather than keyman cover?
Relevant life insurance suits small companies, particularly those with just one or two directors, who want to provide a tax-efficient death-in-service benefit similar to what a large employer's group life scheme offers, but without the minimum number of employees that group schemes usually require. It directly benefits the director's own family rather than the company.
Can a small business have both keyman insurance and relevant life insurance in place?
Yes, and many owner-managed businesses do. The two policies serve different purposes and are not mutually exclusive -- keyman cover protects the company's finances if a key person is lost, while a relevant life policy on the same person separately provides for their family. Sole director companies in particular often set up both to cover the business and personal angles.
Do I need a formal business valuation to set the right level of keyman cover?
It helps. Most advisers base the keyman sum assured on a multiple of the key person's contribution to profit, plus any business debts they personally guarantee and the estimated cost of replacement or recruitment. There is no fixed HMRC formula, but insurers will usually ask for justification of the sum assured relative to the person's economic value to the business.
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