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Key person insurance for sole traders, and the self-employed
Key person insurance for sole traders works differently from company cover.
For a sole trader the business and personal finances are indistinguishable (Royal London ↗), so cover on your own life is personal protection.
What you can do is insure a key employee, with the payout coming to you.
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.
Can sole traders get key person insurance?
Yes, on someone who works for you.
Royal London says sole traders may insure key employees on a life-of-another basis, with the benefit going directly to the business owner to fund reorganisation or replacement (Royal London ↗).
LV= says the sole trader takes out the policy and any claim is paid directly to them (LV= ↗).
Aviva says its business life policy is available to sole traders (Aviva ↗).
On your own life it is personal cover.
Royal London says it is typically set up as personal protection, and where it is life cover only it can go in a gift trust for the family (Royal London ↗).
Summarised from Royal London's and LV='s adviser guides; check each at its link.
Self-employed: the same rules
GOV.UK says a sole trader works for themselves and is classed as self-employed, and that sole traders have unlimited liability: owners are personally responsible for all the debts of the business (GOV.UK ↗).
LV= lists sole traders who are personally liable for business debt among the risks its key person cover helps protect against (LV= ↗).
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How it compares with a limited company
A company has its own legal identity, so it is both the applicant and the owner of key person cover (Royal London ↗).
Relevant life is cover an employer takes out on an employee or director (Royal London ↗), so it is a company or employer product, not one a sole trader can buy on themselves.
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 ↗).
How much cover on a key employee
Royal London's guide for sole traders and partnerships uses a salary multiple where the key person is an employee (Royal London ↗).
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 ↗).
How HMRC treats a sole trader's cover
Your own cover. HMRC says premiums a sole trader pays for life, accident or sickness insurance on themselves are not allowable deductions, and the benefits are not trading income (HMRC ↗).
That includes income protection on yourself.
Royal London says premiums the business pays for such plans are typically treated as drawings (Royal London ↗).
Cover on a key employee. The same two conditions apply as for a company (HMRC ↗).
Where they are met, the payout is income of the trade under section 106 ITTOIA 2005 (HMRC ↗).
Summarised from HMRC's Business Income Manual. Whether the sole-purpose condition is met is a question of fact (HMRC ↗); check your case with your accountant.
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.
- HMRC Business Income Manual, BIM45560 ↗Sole traders and partners insuring themselves
- HMRC Business Income Manual, BIM45525 ↗The two conditions for deducting key person premiums
- Royal London: partnerships, LLPs and sole traders ↗Who can own the plan, trusts, and tax for unincorporated businesses
- LV= key person cover ↗How cover is set up for each type of business
- Aviva Business Life Insurance Options ↗Who the policy is available to, and what it is for
- GOV.UK: what a sole trader is ↗Self-employed, with unlimited liability for business debts
- Legal & General adviser guide ↗Earnings, profit and loan methods for sizing cover
- ABI protection claims 2024 ↗Claims paid, and the common reasons claims were declined
Sole trader and self-employed 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.