11 Purdeys Way, Rochford, England, SS4 1ND
11 Purdeys Way, Rochford, England, SS4 1ND
Both policies are paid for by the business, but that is where the similarity ends. Key Man Insurance pays out to the company if a key employee or director dies or becomes critically ill, so the business can cover lost revenue, recruit a replacement or meet outstanding financial obligations. Relevant Life Cover also has the company paying the premiums, but the payout goes to the employee’s family through a discretionary trust, not to the business at all. Choosing between the two starts with one question: are you trying to protect the company, or the person?
Some businesses depend on one or two people in a way that most do not. If a founder brings in the majority of the revenue, or a technical director holds knowledge that nobody else in the company has, the financial impact of losing them suddenly goes well beyond the inconvenience of replacing a member of staff.
This is where Key Man Insurance fits. The company takes out the policy, pays the premiums, and receives the payout if the insured person dies or is diagnosed with a serious illness covered under the policy. That money can go towards replacing lost profits while a replacement is found, covering recruitment and training costs, or servicing business loans or personal guarantees that were tied to the key individual.
The cover makes particular sense where:
“One of the most common mistakes I see is businesses choosing the wrong type of cover because they sound similar. The key question is always this — are you protecting the business, or the individual? Once that’s clear, the decision between Key Man Insurance and Relevant Life Cover becomes much simpler.”
Jody Pearmain Director – My Key Finance Ltd Connect on LinkedIn
Relevant Life Cover is a life insurance policy for an individual, arranged and paid for by their employing company. It is not business protection in the traditional sense. The payout does not go to the business and is not designed to replace lost profits or cover operational costs.
What it does is give a company director or employee a way to arrange personal life cover through the limited company, at a cost that is typically much lower than taking out a personal policy and paying the premiums from their own net income. The premiums are paid by the company, can usually be offset against corporation tax, and are not treated as a P11D benefit in kind for the individual when the policy is correctly set up in a discretionary trust.
It tends to work well where:
The payout, if it is ever needed, goes directly to the beneficiaries through the trust and sits outside the employee’s estate.
The answer depends on what the money is intended to do.
If the policy is there to protect the business from financial loss, Key Man Insurance is the right tool. The company receives the payout and can use it however the situation requires: covering a revenue shortfall, funding recruitment, or clearing debts.
If the policy is there to give an individual or their family a financial safety net, Relevant Life Cover is usually more appropriate. It is particularly tax-efficient for company directors in the UK, because the premiums are paid by the limited company and can be treated as an allowable business expense, reducing the overall cost compared to personal life insurance paid from net salary.
The tax treatment for both policies depends on how they are structured and the specific circumstances of the business. Our key man insurance taxation guide explains the rules in more detail.
Take a small consultancy where one director brings in most of the client work. If that director died or became seriously ill, the business would lose the income almost immediately while still carrying its fixed costs. A Key Man Insurance policy on that director gives the business the funds to manage that period, whether that means covering the shortfall, hiring a replacement, or winding things down in an orderly way.
Now consider the same director from a personal angle. They want their family to be financially protected if they die, without paying for personal life insurance out of their own net income. A Relevant Life policy arranged through the company provides exactly that. The premiums are a business expense, the payout goes directly to their family through a trust, and the policy does not interfere with the Key Man Insurance the company already holds.
The two policies cover the same person but address entirely different risks.
The most common mistake we see is businesses taking out Key Man Insurance when what they actually need is Relevant Life Cover, or vice versa. The policies look similar from the outside because both are company-paid, both are based on the life of an individual, and both involve life cover. The difference is in where the money ends up, and that distinction matters both practically and for tax purposes.
A second mistake is assuming the tax treatment for one automatically applies to the other. Key Man Insurance premiums may be tax-deductible under the Anderson Principles, but that depends on how the policy is structured. Relevant Life Cover has its own HMRC rules under ITEPA 2003. Getting the structure wrong can mean the tax advantages the business expected do not materialise.
It is also worth checking whether a personal life insurance policy has been taken out when a Relevant Life policy through the company would have been significantly more cost-effective.
Yes, and it is quite common, because the two policies are covering different things.
Key Man Insurance is there for the business. If a director dies or becomes seriously ill, the company receives a lump sum it can use to stabilise its finances, replace the individual, or cover whatever costs arise from their absence.
Relevant Life Cover is there for the individual. If the same director dies, their family receives a lump sum through a discretionary trust, separate from the business and outside the estate for inheritance tax purposes.
Neither policy duplicates the other. A company can hold both on the same individual without any conflict, and many do.
Not better or worse, they cover different risks. Key Man Insurance protects the company’s finances if a key person dies or becomes critically ill. Relevant Life Cover provides a tax-efficient death benefit for an individual’s family. The right option depends entirely on whether you are trying to protect the business or the person.
Yes. Because the two policies serve different purposes, they do not overlap. Key Man Insurance pays the business; Relevant Life Cover pays the individual’s family through a trust. Many companies hold both on the same director or key employee without any issue.
In most cases, yes. Premiums are generally treated as an allowable business expense, which means the company may receive corporation tax relief. When the policy is written correctly in a discretionary trust, the premiums are also usually not treated as a P11D benefit in kind for the employee. Tax treatment depends on individual circumstances, so we recommend taking professional advice before arranging cover.
With Key Man Insurance, the payout goes to the business. With Relevant Life Cover, the payout goes to the employee’s nominated beneficiaries via a discretionary trust, not to the company.
Both depend on the insured person’s age, health and the level of cover, so there is no single answer. The net cost of Relevant Life Cover is often lower than equivalent personal life insurance, because the premiums are paid by the company and are typically corporation-tax-deductible. We provide quotes for both, so you can compare real figures for your situation.
Jody Pearmain is a UK financial adviser specialising in business protection for company directors, shareholders and SME owners. With over 15 years of experience, he helps businesses arrange practical protection solutions including Key Person Insurance, Relevant Life Insurance, Shareholder Protection and Business Loan Protection.
Through MyKeyManInsurance.com, Jody writes clear, practical guides designed to help business owners understand cover options, tax treatment, underwriting considerations and the commercial risks of leaving key people, share ownership or business debt unprotected.
Helping UK Companies since 2008.
