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Key person insurance for limited companies, owned by the company
Key person insurance for limited companies is the simplest case.
The company has its own legal identity, so it is both the applicant and the owner of the policy (Royal London ↗), pays the premiums and receives the proceeds (Royal London ↗).
This guide covers how that works, who the company can insure and how HMRC treats it.
Every claim here is our summary of a named external source, linked beside it. Sources change: check the wording at the link before you rely on it.
How limited companies arrange key person insurance
Royal London describes the set-up: the company is the owner, the key person is the person covered, authorised signatories sign for the company and the key person also signs as the person covered (Royal London ↗).
There is no need for a trust (Royal London ↗).
A plan can have a single owner but joint lives, paying out on the first event, for example where a company with two 50% shareholders has borrowed money (Royal London ↗).
Legal & General says you need the agreement of the person being covered and a financial relationship with them (Legal & General ↗).
Owner
The company applies and owns the plan
It has its own legal identity, so it is applicant and owner.
Life covered
The key person agrees and signs
Authorised signatories sign for the company; the key person signs as the person covered.
Premiums
The company pays
From company funds. No trust is needed.
Claim
The company receives the proceeds
To settle debt, meet its needs while it reorganises, or recruit.
Summarised from Royal London's guide (Royal London ↗).
Board resolution and records
The sources we cite do not make a board resolution a requirement for buying cover.
What matters for tax is purpose: HMRC decides whether the sole-purpose condition is met on evidence of what the directors were seeking to achieve by taking out the policy (HMRC ↗).
- A policy on directors who are major shareholders, but not other employees (HMRC ↗)
- Benefits above what similar businesses typically offer employees of equivalent status (HMRC ↗)
- Protecting the value of a director's shares, and so their estate (HMRC ↗)
- Record the purpose the directors had in mind: that is the evidence HMRC weighs (HMRC ↗)
- Ask the accountant or corporate tax adviser to write to the local inspector to gauge their view; a binding decision may not come back (Royal London ↗)
Tax treatment for limited companies
HMRC allows the premiums only if the sole purpose is meeting a loss of trading income, not a capital loss (HMRC ↗), and a life policy is term insurance with no other benefits (HMRC ↗).
Where both conditions are met, a payout is income of the trade under section 103 of the Corporation Tax Act 2009 (HMRC ↗).
Royal London says that many, if not most, plans fail one or more of the tests, and that no relief on premiums does not guarantee a tax-free payout: HMRC reserves the right to tax the proceeds (Royal London ↗).
Directors vs employees
The company can insure a director, an employee or anyone whose skill, knowledge and experience affects revenue (Legal & General ↗).
Royal London says shareholding is not necessarily a good indicator of who is key (Royal London ↗).
For tax, it matters.
Royal London says working directors can be treated as employees, but not shareholding directors, though an inspector may accept a minority shareholder (Royal London ↗).
Legal & General's rule of thumb is that relief should be available where the shareholding is under 5% (Legal & General ↗); HMRC states no percentage.
For cover that pays a director's family rather than the company, see relevant life (Royal London ↗).
How much cover the company needs
Royal London calls profit the main way to value a key person (Royal London ↗).
Legal & General routinely averages the last 2 years' profit (Legal & General ↗).
Cover can also be set at a loan the business would need to repay if the key person passed away (Legal & General ↗).
For a shareholding director, Royal London says a salary multiple may not reflect their worth to the business (Royal London ↗); the profit method may fit better.
Steps to arrange cover
These are the steps the sources describe, in order.
An FCA-authorised adviser or broker can arrange the policy.
Identify
Find who the profit depends on
Loans, sales or future plans that rest on one person.
Agree
Get the person’s agreement
Insurers need it, and a financial relationship with them.
Size
Put a number on the loss
Profit, earnings or the loan, using the multiples insurers publish.
Apply
The company applies as owner
The key person answers the health questions fully and accurately.
Check
Use an authorised firm
The FCA tells consumers to check a firm on its Firm Checker first.
Sources: Legal & General (Legal & General ↗), the ABI on declined claims (ABI ↗), the FCA (FCA ↗).
How it compares with other businesses
A partnership in England, Wales or Northern Ireland cannot own the policy, and a sole trader's own cover is personal.
The table sets out each form.
Rows summarise how the insurers and HMRC describe each structure; check each at its link. Aviva says its business life policy is available to limited companies, LLPs, individual partners and sole traders (Aviva ↗).
Claims, and how they pay
The ABI named two common reasons claims were declined: existing medical conditions not disclosed, and policy definitions not met (ABI ↗).
Full, accurate answers on the application deal with the first.
Check it for yourself
Every claim on this page is our summary of one of the documents listed here.
We last checked them against the live sources on 28 September 2026.
The documents are the authority, not this page.
Insurers and HMRC update them, so validate any figure or condition at its link before you rely on it.
- Royal London: companies, key person protection ↗Who is key, sizing methods, start-ups, venture capital and loans
- Royal London: companies, tax implications ↗Shareholding directors, loan cover and benefit in kind
- HMRC Business Income Manual, BIM45525 ↗The two conditions for deducting key person premiums
- HMRC Business Income Manual, BIM45530 ↗Non-trade purposes, including major-shareholder directors
- Legal & General key person insurance ↗Who a key person is, the roles typically covered, what a payout helps with
- Legal & General adviser guide ↗Earnings, profit and loan methods for sizing cover
- Scottish Widows underwriting FAQs ↗What counts as remuneration, and loan cover
- LV= key person cover ↗How cover is set up for each type of business
- ABI protection claims 2024 ↗Claims paid, and the common reasons claims were declined
Limited company cover, answered
Not financial advice. This page is general information. Before buying insurance, the FCA tells consumers to check the firm on its Firm Checker (FCA ↗). For free guidance, see MoneyHelper.