Business protection insurance, explained

Business protection is insurance that protects a business, and the people who own it, against the death or serious illness of someone it depends on. The policies themselves are familiar: life cover, critical illness cover and income protection. What makes them "business" protection is who owns the policy, who gets the money, and what it is for.

There are four main types: key person cover, which protects trading income; shareholder or partnership protection, which helps the surviving owners buy out a departing owner's stake; relevant life cover, an employer-paid life policy for one employee; and group life (death in service), which covers staff as a benefit. Each has its own tax treatment, and in Scotland, partnerships have a legal position that differs from the rest of the UK.

Key person cover

A key person is someone whose skills, contacts or work bring in a significant share of the profits. Key person insurance is owned by the business and pays the business if that person dies or, depending on the policy, becomes critically ill. The money can help cover lost profits, recruitment or a period of disruption.

HMRC's guidance sets out when premiums are deductible for tax. Broadly, the sole purpose must be the trade purpose of meeting a loss of trading income from losing that person's services, and for life cover the policy must be term insurance with no other benefits, ending no later than the period the person is useful to the business. Where premiums are deductible, payouts are taxed as trading income. HMRC also flags warning signs that a policy is for personal rather than trade purposes, such as covering only directors who are major shareholders. See our full guide to key person insurance.

Shareholder and partnership protection

When an owner dies or becomes seriously ill, their share of the business can pass to their family, who may not want to be involved, while the remaining owners may not have the cash to buy it. Shareholder and partnership protection is designed to provide that cash.

Companies

For a limited company, the money can be used by the remaining shareholders to buy the shares, or by the company itself. The Companies Act 2006 allows a limited company with share capital to buy back its own shares, subject to the Act's rules and anything in its articles. How the policies are owned, who the beneficiaries are, and how any share purchase agreement is worded all affect the tax and legal outcome, so it can make sense to involve a solicitor and an accountant as well as an adviser.

Partnerships, and why Scotland is different

Under section 33 of the Partnership Act 1890, unless the partners have agreed otherwise, a partnership is dissolved by the death of any partner. A partnership agreement that says what happens instead, combined with insurance that funds it, is how many partnerships plan for this.

Scotland is different in one important way. Section 4(2) of the same Act says that in Scotland a firm is a legal person distinct from the partners. The Act gives that status only to firms in Scotland. That difference can matter for how a partnership agreement is drafted and how insurance arrangements are structured, so if your partnership is Scottish, it is worth asking a Scottish solicitor to review both together.

Relevant life cover

A relevant life policy is life cover for one employee or director, paid for by the employer, with the benefit going to the employee's family or other individuals. It works like death in service, but for one person rather than a group.

HMRC's guidance says a payment from a relevant life policy is not taxed under the rules for employer-financed retirement benefits schemes. To qualify, the policy must meet conditions including paying a lump sum on death before an age no later than 75, having no surrender value, paying only to individuals or charities, and not having tax avoidance as a main purpose. See our guide to relevant life cover.

Group life and death in service

Many employers provide life cover for staff as a group policy. MoneyHelper notes that this death-in-service benefit is usually linked to your salary, and that you lose it if you leave that employer. HMRC describes an excepted group life policy as one that provides only death benefits and meets certain other conditions.

If you have moved from employment to self-employment, MoneyHelper points out that any death-in-service cover will have ended when that job ended.

Group income protection

Employers can also provide group income protection. HMRC's guidance says benefits from employer-paid group cover are taxed as employment income, except for any part that reflects premiums the employee paid. That differs from a personal policy, where benefits are generally tax-free. Our income protection guide explains how the cover works.

Who is involved in setting it up

Business protection usually touches several sets of documents at once, which is why it helps to keep them together:

• The policies themselves, which set out who is insured, for how much, and on what definitions.
• Any trust the policies are written into, which decides who receives the money. Scotland has its own trust law, updated by the Trusts and Succession (Scotland) Act 2024.
• The business's own documents: the company's articles, any shareholders' agreement or share purchase agreement, or the partnership agreement.
• The tax treatment your accountant expects for premiums and payouts.

If one of these changes, for example a new partner joins or the company's articles are updated, the others may need to be checked too.

What changes the cost

The same factors that affect personal protection apply to each person covered: age, health, smoking, occupation, the amount of cover and the term. For business cover, it can make sense to ask the insurer how it assesses the amount it will cover, for example by reference to profits or share values.

How claims work and why they get refused

Business policies use the same kinds of definitions as personal ones, so a claim turns on whether the death or illness meets the policy wording and whether the application answers were accurate. Our guide to declined claims covers the process for individuals.

What to check in your policy

• Who owns the policy and who receives the payout: the business, the other owners, or the insured person's family.
• Whether it is written in trust, and for a Scottish business, whether the trust and partnership documents reflect Scots law.
• The agreement behind it: whether a share purchase or partnership agreement exists and still matches the cover.
• Sum assured: whether it still reflects current profits or share values.
• Term: whether it runs beyond the person's likely working life or the period they are key to the business.
• What triggers a payment: death only, terminal illness, or critical illness too.
• Tax treatment: what your accountant expects for premiums and payouts.
• For group schemes: how benefit is calculated, any free cover limit, and what happens when someone leaves.

When to talk to a regulated adviser

Business protection sits across insurance, tax and company or partnership law. A regulated financial adviser can recommend cover, but the agreements and tax position usually also need a solicitor and an accountant. If your business is a Scottish partnership, a Scottish solicitor is the right person to look at the legal side. InsuredRight does not recommend products, but our free policy check can help you find the clauses above in your existing documents.

Common questions

What is the difference between key person cover and shareholder protection?

Key person cover pays the business if it loses someone whose work drives its profits, to help replace lost income. Shareholder protection is about ownership: it gives the remaining owners, or the company, money to buy a deceased or seriously ill shareholder's shares. One protects trading income; the other helps keep control of the business with the people still running it.

Are key person insurance premiums tax-deductible?

HMRC's guidance says they can be, if the sole purpose is the trade purpose of meeting a loss of trading income from losing the key person, and, for life cover, the policy is term insurance with no other benefits, lasting no longer than the person's usefulness to the business. Where premiums are allowed, payouts are taxed as trading income. An accountant can confirm the position for your business.

What happens to a partnership when a partner dies?

Under the Partnership Act 1890, unless the partners have agreed otherwise, a partnership is dissolved by the death of any partner. A partnership agreement can set out what happens instead, and partnership protection can provide money to fund it. In Scotland, a partnership is also a legal person separate from its partners, which can affect how arrangements are set up.

Is death in service the same as life insurance?

Death in service is life cover provided through your employer. MoneyHelper notes the amount is usually linked to your salary, and that it ends if you leave that employer. Many are written as group policies covering lots of employees. A relevant life policy is a similar employer-paid benefit for one individual, often used by smaller companies.

Is group income protection taxed?

HMRC's guidance says benefits from employer-paid group income protection are taxed as employment income, apart from any just and reasonable part that matches premiums the employee paid. Benefits from a personal policy you pay for yourself are generally tax-free. Check payslips during a claim to see how tax is being applied.

Sources

1. HMRC BIM45525: specific deductions, insurance, employees and other key persons checked 2 Oct 2026
2. HMRC BIM45530: specific deductions, insurance, key persons, non-trade purposes checked 2 Oct 2026
3. HMRC EIM15045: employer-financed retirement benefits schemes, relevant life policies checked 2 Oct 2026
4. HMRC IPTM7020: excepted group life policies checked 2 Oct 2026
5. HMRC IPTM6120: employer's schemes (ITTOIA05/S743) checked 2 Oct 2026
6. Partnership Act 1890, section 4 (meaning of firm; Scottish firm as legal person) checked 2 Oct 2026
7. Partnership Act 1890, section 33 (dissolution by death) checked 2 Oct 2026
8. Companies Act 2006, section 690 (purchase of own shares) checked 2 Oct 2026
9. MoneyHelper: What is life insurance? (death in service) checked 2 Oct 2026
10. MoneyHelper: Personal insurance when you're self-employed checked 2 Oct 2026
11. Trusts and Succession (Scotland) Act 2024 checked 2 Oct 2026
12. ABI: Protection insurance checked 2 Oct 2026

This guide is general information about how insurance works in the UK. It isn't advice and doesn't take your circumstances into account. Policies differ: your own policy documents are what count.