Relevant life vs key person insurance: what each one does
21 October 2026
Quick answer: relevant life vs key person insurance comes down to who gets paid. Relevant life cover insures one named employee and pays their family. Key person insurance pays the company for lost trading income. Section 393B(4)(b) of ITEPA 2003 defines relevant life cover; HMRC's conditions for deducting key person premiums sit at BIM45525.
Relevant life cover and key person insurance are both paid for by the company, and that is where the similarity ends. One is a death benefit for an employee's family. The other is a cash injection for the business.
Directors come to us with a quote in hand and no way of telling which of the two they have been offered. Our relevant life insurance guide for directors and employees covers how we arrange it. This article is about telling them apart.
What a relevant life policy is, and what it is not
A relevant life policy is a single-life death benefit, bought and paid for by an employer on the life of one employee or director, held for that person's family.
The term is not marketing language. It is defined at section 393B(4)(b) of the Income Tax (Earnings and Pensions) Act 2003 as a policy of life insurance, in the Act's words, “the terms of which provide for the payment of benefits on the death of a single individual”, which must also meet condition A read as referring to the death, conditions C and D in section 481, and conditions A and C in section 482, of the Income Tax (Trading and Other Income) Act 2005.
Section 393B(3)(c) lists “benefits under a relevant life policy” as an excluded benefit, and section 393B(2)(c) takes excluded benefits out of the meaning of “relevant benefits”. The section is on legislation.gov.uk.
Three things to get straight. The single-life policy people mean by the name sits in limb (b) of section 393B(4). Limb (a) of the same definition is an excepted group life policy under section 480 of ITTOIA 2005, so a workforce death-in-service scheme is a different limb, not this product. It does not pay the business. And it needs an employment relationship, because section 393B is framed around an employee or former employee.
A sole trader or equity partner insuring their own life is buying personal life insurance, whatever the premium is paid from.
What key person insurance is, and what it is not
Key person insurance is a policy the company takes out, owns and benefits from, covering a person whose loss would cost the business trading income, such as the salesperson who holds the client relationships or the technical director the contracts depend on. The money goes to the company.
HMRC's guidance sits in its Business Income Manual at BIM45525, titled “Specific deductions: insurance: employees and other key persons”. It sets conditions rather than a blanket yes.
What key person insurance is not: protection for the insured person's household. A director who assumes the company policy covers their spouse has misread it.
It is also not a substitute for the individual's own cover. Our guide on whether you still need life insurance with death in service explains how the two sit together.
Relevant life vs key person insurance at a glance
| Relevant life cover | Key person insurance | |
|---|---|---|
| Whose life is insured | One named employee or director | One named employee or director |
| Who receives the payout | The individual's family or beneficiaries | The company |
| What it replaces | A death benefit for that person's household | Trading income the business loses |
| Normally held in trust | Yes, for the beneficiaries | No, the company benefits |
| Where the rules come from | Section 393B(4)(b), ITEPA 2003 | HMRC Business Income Manual, BIM45525 |
| Cover type | Benefits on the death of a single individual | Term insurance with no other benefits, for premiums to be allowable |
| Works for a sole trader | Only on someone they employ, not on their own life | Yes, on an employee; BIM45525 covers unincorporated businesses too |
| A company pays Corporation Tax on its profits whichever premium it pays: GOV.UK gives the small profits rate as 19% on profits of £50,000 or less and the main rate as 25% above £250,000, with Marginal Relief in between (checked 21 October 2026). | ||
Who receives the payout is the row that decides the rest: a relevant life policy pays the family, key person insurance pays the business, and the other differences follow.
Not sure which one you have been quoted?
Send us the quote or policy schedule and we will tell you who the payout goes to. There is no charge for a conversation. If you take out a policy, the insurer may pay us a commission.
WhatsApp us about your quoteInformation to compare the two, not advice.
The HMRC conditions on key person premiums
BIM45525 does not say key person premiums are deductible. It says: “The premiums on such a policy will be allowable if all the following conditions are met”.
The first condition HMRC sets out is that “the sole purpose of taking out the insurance is the trade purpose of meeting a loss of trading income that may result from loss of the services of the key person, and not a capital loss”. A policy protecting the value of the business, not its income, is something else.
The manual also requires, in HMRC's wording, “term insurance, providing cover only against the risk that one or more of the lives insured dies within the term of the policy, with no other benefits”. It adds that “the insurance term should not extend beyond the period of the employee's usefulness to the company”.
BIM45525 says whole life or endowment policies, and critical illness or accident policies with an investment content, “are capital expenditure and will not be deductible”, citing Earl Howe v CIR [1919] 7 TC 289.
Where a policy fails the conditions, HMRC says “the premiums cannot be deducted, and receipts under that policy are not taxed as trading income”. The same page adds that the treatment of receipts is a separate question of law, and gives no assurance about a future receipt. A failed deduction test is therefore not automatically worse, and not a promise either. The full page is on GOV.UK.
What the company's tax position turns on
We arrange protection, not tax. Whether a premium is deductible for your company is a question for your accountant, who can see the trade purpose, the policy wording and the accounts. Anyone answering before looking at all three is guessing.
The sum being argued over is set by the Corporation Tax rates. GOV.UK gives the small profits rate as 19% on profits of £50,000 or less, and the main rate as 25% above £250,000, with Marginal Relief in between. Those thresholds shrink for short accounting periods and associated companies, per GOV.UK, checked 21 October 2026.
At 19%, every £1,000 of deductible premium takes £190 off the Corporation Tax bill; at 25% it takes off £250. That is rarely the right reason to choose one product over the other.
For relevant life cover, the trust is what directs the money to the right people. Our free trust guidance covers it, and should life insurance be written in trust explains why it matters on personal policies.
The mistake directors make
The first mistake is buying one policy and expecting it to do both jobs. A company-owned policy that pays the company does nothing for the family at the kitchen table. A relevant life policy held in trust does nothing for the company's cash flow.
The second is assuming it is sorted because the accountant mentioned it once. Check the policy schedule: if the beneficiary is the company, it is key person cover, whatever it was called in the meeting.
The third is buying key person cover that nothing needs. A company with no debt and no contracts hanging on one individual may genuinely not need it, and premiums to insure a loss that would not happen are money gone. Relevant life cover earns its place whenever someone at home depends on that income.
Start from the loss you are covering, then pick the policy that pays whoever would carry it. Our protection insurance guide covers the products around these two.
Frequently asked questions
Is relevant life cover the same as key person insurance?
No. A relevant life policy pays the insured person's family or beneficiaries. Key person insurance pays the company.
Who gets the payout from a relevant life policy?
The individual's family or chosen beneficiaries, normally through a trust set up when the policy starts. The company pays the premiums but receives nothing.
Who gets the payout from key person insurance?
The company. The policy puts money into the business to cover the trading income it loses.
Can a sole trader have a relevant life policy?
Not on their own life. Section 393B of ITEPA 2003 is framed around benefits provided for an employee or former employee, so a sole trader can hold a relevant life policy on someone they employ, but not on themselves.
Are key person insurance premiums tax deductible?
Not automatically. BIM45525 says the premiums will be allowable only if all of several conditions are met, including that the sole purpose of the insurance is the trade purpose of meeting a loss of trading income.
Can a key person policy include critical illness cover?
A policy can be arranged that way, but it affects the tax position. BIM45525 states that critical illness or accident policies with an investment content are capital expenditure and will not be deductible.
Can a company have both policies on the same person?
Yes. They do different jobs, so holding both is common where one person matters to the business and has a family depending on their income.
Related reading
- Relevant life insurance for directors and employees
- Do I need life insurance with death in service?
- Should life insurance be written in trust?
- Protection insurance explained
Want the policy schedule read with you?
We arrange relevant life cover for limited company directors and employees. There is no charge to you for a conversation. If you take out a policy, the insurer may pay us a commission. Use the contact page or call 0330 043 1229.
That's Family Finance is a trading name of RB AME Ltd, authorised and regulated by the Financial Conduct Authority, FCA number 1055079. This article explains how two products work. It is not personal advice or tax advice. Tax treatment depends on your company's individual circumstances and may change.