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Business owners don’t think twice about insuring their premises and stock, or getting public liability and legal cover. But what about the different types of life insurance a company might need?
It’s important to think about how the business would cope if a crucial member of staff had a serious illness that kept them away from work – perhaps permanently. And what would the financial ramifications be if an owner or key stakeholder died suddenly and unexpectedly?
Life insurance and critical illness cover can also be a valued employee benefit that helps to attract and retain staff.
If you run a company, it is important to consider getting life insurance. Our guide explains more.
What is business life insurance?
Business life insurance is a form of financial protection that would pay out a lump sum if a business owner, partner or key member of staff died. In a similar way term life insurance for individuals, the business pays a monthly premium for the insurance protection with premium prices based on the risk and the value of the staff member to the business.
There are also other types of business life insurance including cover that might be offered as a company benefit to members of staff (more on the different types of business life cover below).
Why could business owners need life insurance?
Business life insurance can protect a business from financial problems in the event an owner, director or key member of staff dies or is diagnosed with a serious illness and can’t work. A payout from this type of insurance can be critical in supporting a business during a difficult and uncertain time.
While many business owners agree that the loss of a key person can have dire consequences for their business, more than 50% do not have any cover in place, according to a recent small business report ‘State of the nation’s SMEs’ by insurer Legal & General. In addition, the report found more than half of businesses (52%) believe they would cease trading in under one year if they lost a key person. This is particularly true for sole traders and new businesses.
The lump sum paid from business life insurance could be used to keep a business running smoothly, or to help cover the costs of hiring replacement staff, either permanently or temporarily.
A business that has this form of insurance in place could also be viewed more positively by potential investors, as it offers a form of security for the business.
What type of business life insurance is available?
There are different types of business life insurance which owners should consider:
Keyman insurance
Life insurance can be just as important for business owners as it is for individuals, who take out cover to provide financial support to their loved ones should the worst happen.
Business owner life insurance, which is sometimes referred to as keyman or keyperson insurance, could be the lifeline you need to keep your company afloat should disaster strike and an important individual in your company is diagnosed with a critical illness or dies.
Policies usually cover one ‘key’ or pivotal person within the business – this might be the founder or chief executive, for example, or an employee with skills that are crucial to the company’s success and who would be difficult to replace, such as a top salesperson.
Business life insurance is what is known as a ‘term’ insurance policy. The term is the duration of the policy, typically 10 years. Premiums are paid monthly or annually. If after the fixed term the business has not needed to make a claim, the policy ends, there is no payout, and no return of premiums.
If the business does have to claim, payouts (which might be regular payments or one lump sum) are made directly to the business – not to any individual or business owner.
The proceeds of a claim can only be used towards the running of the business, such as debt repayments for general cashflow, or for costs incurred recruiting new staff, for example.
The cost of business life insurance will depend on a range of variable factors including the age and state of health of the life you want to insure. Is the member of staff a smoker, for example? Or do they have pre-existing medical conditions? These factors can push up premiums for life cover.
The premium will be calculated based on the amount of insurance cover you want and the term (or length) of the policy – so expect to pay more if you need a high level of cover for a long time.
The insurer will want to calculate how valuable the person is to the business to ensure an appropriate level of cover.
Business life insurance for directors, owners and shareholders
As a business owner it is important to think about what would happen if a fellow owner, partner or shareholder in the company died or was incapacitated. In some instances, this could cause ownership disputes and significant difficulties for the successful running of the business.
The loss of a business owner or key employee will affect a business in many different areas. Research in Legal & General’s ‘State of the nation’s SMEs’ report found the most notable impact was a loss in profits (30%), followed by an increase in expenses to recruit replacement staff (20%) and to repay loans (10%).
Shareholder life cover – in a similar way to keyman insurance – can protect from problems arising from this eventuality and would mean funds would be released (from the insurance payout) to help, for example, with buying out the shares of a deceased shareholder.
The graph below from Legal & General’s State of the Nation’s SMEs report illustrates how the majority of small businesses have only one or two owners. This highlights how significant the loss would be if one business owner died.
Group life insurance
Group life insurance is simply a way of offering life insurance (and sometimes critical illness) cover en masse to staff members, with each individual having cover on the same terms. The business buys the cover as a group scheme, typically taking advantage of group discounts.
More businesses are offering life insurance as a company benefit to their staff - often as part of a wider package of ‘perks’, but increasingly life cover is viewed by employees as a standard benefit they would expect when moving jobs, for example.
For business owners offering a group life cover scheme can be a good way to attract and retain valuable workers. For staff who take up the benefit, it means that in the event of their death (or in some cases critical illness), a vital payment is made to help support their loved ones.
Business loan protection insurance
Business loan protection is cover that would pay off an outstanding debt if a key member of staff in the business, or the owner, for example, died or was critically ill.
This insurance cover is typically linked to the debt. This might be a business loan, bank overdraft or a personal guarantee on a business loan, for example. The insurance is often arranged on a decreasing term basis, so the sum insured would fall each year as the outstanding debt reduced.
Which business life insurance is right for my business?
The type of life insurance cover that’s right for your business will depend on a range of factors, including the structure of the business and the extent of the impact if an owner or director was no longer around.
It may be the case that a particular business needs a mix of different life policies, such as keyperson insurance and business loan protection, for example. It could also offer a group life insurance policy to employees as well.
The cover provided under a group life policy is usually set at an amount equal to four times annual salary, but this can be increased at the cost of a higher premium.
How can I find the best business life insurance?
The best way to find good cover at the lowest cost premium is to shop around and compare deals, remembering to read any terms and conditions - plus any exclusions - and be certain you know exactly what cover you’re buying from the outset.
Cover may not be as expensive as you think (80% of business owners estimated the cost of business life insurance to be three times higher than the actual premium, according to research by Legal & General). And crucially, business life insurance can offer valuable peace of mind that your business will be financially protected if a keyperson died.
Frequently Asked Questions (FAQs)
Can I take out business life insurance as a sole trader?
Sole traders and freelancers should usually be able to take out business life insurance.
Read the small print of any policies so you know exactly how the cover works and to ensure that your particular business set up is eligible.
Should small business owners consider business life insurance?
It is well worth considering life insurance protection for a small business. It could be a financial safety net for the organisation if for example a key member of staff dies or is incapacitated.
The impact of an event like this can be much bigger for a smaller business. Having life insurance for the business can also be viewed positively by investors and those who might financially support the business, so it may be a good idea from this point of view.
Can I pay for business life insurance through my business?
Business life insurance policies can be purchased through the business. The business will usually own the policy and pay all premiums (including for group life cover schemes for staff).
This is likely to be a more tax-efficient way to buy cover, compared to the purchase of personal life insurance. This is because in many cases, the business is likely to be able to claim tax relief on the premiums.
Is life insurance for businesses tax deductible?
Companies who buy group life cover schemes to offer their staff as a company benefit can usually claim the premiums as tax deductible.
Keyman life insurance and shareholder life insurance premium payments are a more complex area.
In some cases insurance payments of this type may be tax deductible for the business. But this will depend on a number of factors, such as how any proceeds of a payout would be spent by the company.
There is more information in our guide to keyman insurance, but speak to HMRC or an accountant/tax advisor to get clarity on this area pertaining to your precise circumstances.
