The Difference Between Key Person & Relevant Life Cover

Key person insurance, also known as key man insurance or key person life insurance, and relevant life cover (often called relevant life insurance) are both arranged and paid for by a business.

They can look similar at first, as both are types of life insurance set up through a company, but they do different things.

Key person insurance protects the business. Relevant life insurance protects the individual and their loved ones.

That difference is what matters when deciding which one to use. 

Understanding key person insurance

Key person insurance, sometimes called key man insurance, is a type of life insurance designed to protect a business.

It covers the risk of losing someone the business depends on, such as a director, founder or employee whose work drives income or keeps things running.

How key person insurance works

The business takes out the policy and pays for it. If something happens to that person, the policy pays a lump sum to the business.

That money stays within the business. It can be used to manage a drop in income, repay debts, bring in a replacement or give the business time to adjust. The aim is to help the business continue operating while it deals with losing someone important.

When it’s usually used

Key person life insurance is normally used where the business relies heavily on one or two individuals. This can include situations where revenue depends on a specific person, where there is borrowing linked to them, or where investors want to protect their interest.

In every case, the focus stays the same. The policy is there to support the business itself.

Exploring relevant life cover

Relevant life cover, also known as relevant life insurance, works differently.

It’s still arranged and paid for by the business, but the purpose is to provide life insurance for an individual which is paid to their loved ones.

How relevant life cover works

A relevant life insurance policy pays a lump sum to an employee’s family if they die during the policy term.

The business sets up and pays for the policy, but the payout goes to the individual’s family, not to the business. The policy is usually written in trust. This means the payout goes directly to the intended people, is typically paid tax-free, and does not form part of the individual’s estate.

Why businesses use relevant life insurance

Relevant life cover is often used by company directors and small business owners who want life insurance arranged through the business.

It can also be used for employees where a full group life scheme is not in place. In most cases, it is chosen because it is a straightforward and tax-efficient way to provide personal life cover.

Understanding the tax differences

Tax treatment is one of the main differences between these two types of cover.

With key person insurance, premiums may sometimes be treated as a business expense, while any payout is usually received by the business. Whether tax applies depends on how the policy is set up and what it is designed to cover.

With relevant life insurance, premiums are paid by the business and may qualify for tax relief. Because this can vary depending on the business and the purpose of the policy, it is always worth checking the detail with an accountant.

The payout is usually made to the individual’s family and, if arranged under a Discretionary Trust, can be paid as a tax-free lump sum. 

Choosing the right cover

The right option depends on what you want to protect.

Key person insurance is usually used where the aim is to protect the business from financial loss or disruption. Relevant life cover is used where the aim is to provide financial protection for an individual and their family.

Many businesses use both. One type of life insurance protects the business itself. The other provides personal protection for the people behind it.

Protection options for UK businesses

Key person insurance and relevant life cover are part of a wider range of business protection.

Business protection is there to help a company continue if something happens to the people it depends on.

Other options include business loan protection, shareholder or partnership protection, and employee benefits such as group life or income protection.

What matters most is how these are set up. The structure needs to reflect how the business works, who creates value and where the money should go if a claim is made. If not, there can be delays, tax issues or payouts going to the wrong place.