Key Person Insurance for Limited CompaniesHow Ltd Companies Arrange Cover

Key person insurance for limited companies works as follows:

• Policy owner - The limited company takes out the policy (not the individual)
• Life assured - The key person (director, employee, or shareholder)
• Beneficiary - The limited company receives any payout
• Premium payer - The company pays premiums from business funds

This structure is important for tax purposes and ensures the payout goes to the business rather than the individual's estate.

Before a limited company takes out key person insurance, a board resolution should be passed. This:

• Formally authorises the company to take out and pay for the policy
• Records the business purpose of the insurance (important for HMRC)
• Documents which key people are being insured and why
• Provides evidence of the commercial rationale if ever queried

A simple board minute recording the resolution is usually sufficient. Your company secretary or accountant can advise on the exact wording, but it should state the business purpose (e.g., "to protect the company against financial loss resulting from the death or critical illness of [name]").

The tax treatment of key person insurance for limited companies depends on the purpose:

Protecting Profits (Revenue Purpose)

• Premiums may be deductible as a trading expense
• Any payout would be taxable as a trading receipt (corporation tax)
• Net benefit is still significant despite tax on payout

Protecting Loans (Capital Purpose)

• Premiums are NOT tax-deductible
• Payout is NOT taxable
• Common when the policy secures a specific business loan

HMRC assesses each case on its facts. The key test is whether the policy's sole purpose is to protect trading profits. See our tax guide and corporation tax guide for full details.

Limited companies can take out key person insurance on both directors and employees:

Insuring Directors

• Most common for SMEs where directors are also shareholders
• Consider whether shareholder protection is also needed alongside key person cover
• No benefit-in-kind charge for the director (the policy belongs to the company)

Insuring Employees

• Any employee who is critical to the business can be insured
• No benefit-in-kind charge for the employee
• The employee must consent and provide health information
• Consider relevant life policies as a tax-efficient alternative for death-in-service benefits

To set up key person insurance for your limited company:

1. Identify key people - Who would have the greatest financial impact if lost?
2. Calculate cover amounts - Use our calculator
3. Pass a board resolution - Formally authorise the company to take out the policy
4. Choose cover type - Life, critical illness, or combined
5. Get quotes - Compare providers
6. Apply - The company applies as policyholder; the key person completes health questions
7. Record in accounts - Premiums are a business expense; discuss treatment with your accountant