In 2025, the boundaries between personal and business finance have never been more intertwined. Directors of limited companies, contractors, and high-earning professionals are increasingly looking for ways to protect their families, their businesses, and the value they’ve built—without losing out to unnecessary tax exposure. Yet one area that continues to cause confusion is the distinction between Relevant Life Insurance and Key Person Insurance.

Both policies involve company-paid premiums and both provide valuable life cover, but they are designed to protect entirely different things. One looks after people, while the other safeguards profits. Understanding this difference is essential to building a complete protection strategy for your company.

At Willow Private Finance, we regularly see business owners who have one but not the other, often under the mistaken impression that a single policy will cover every eventuality. The truth is more nuanced. Each has its own purpose, tax treatment, and financial logic—and when used correctly, the two complement each other beautifully.

Before we dive into those distinctions, it’s worth placing this conversation in the context of today’s business environment. Across the UK, company directors are operating in a climate of tightened fiscal rules, corporation tax reform, and a sharper focus on compliance. The cost of getting protection wrong—both in financial and regulatory terms—has never been higher.

For broader context on the evolving protection landscape, see our related article Protection in 2025: The Ultimate Guide to Safeguarding Your Family, Health, and Business, which explores how directors can align personal and corporate risk management.

The Market Context in 2025

The UK’s business protection market has shifted meaningfully over the past few years. Rising costs, higher corporate taxes, and an increased focus on director accountability have made it essential for company owners to formalise their protection arrangements.

Relevant Life Insurance has seen significant growth because of its unique ability to combine tax efficiency with personal protection. For small limited companies that don’t have access to group life schemes, it remains one of the few ways to provide death-in-service benefits in a compliant and cost-effective manner.

At the same time, the need for Key Person Insurance has been reinforced by a turbulent economic cycle. With supply chain pressures, recruitment challenges, and reliance on key individuals at an all-time high, losing a core member of staff—or a founder—can have catastrophic financial consequences. Banks, investors, and even private equity partners increasingly expect businesses to carry this kind of insurance as a condition of funding.

What’s clear is that 2025 is not the year to treat business protection as optional. The question for directors is not if they need cover, but which type—and how to structure it properly.

Understanding Relevant Life Insurance

Relevant Life Insurance is an employer-funded life policy set up to pay a tax-free lump sum to an employee’s or director’s beneficiaries in the event of their death or terminal illness. It is, in effect, an individual death-in-service benefit arranged by the company for the person insured.

The policy is paid for by the business but held in a discretionary trust for the benefit of the insured’s chosen beneficiaries, typically their family. This structure ensures that the payout sits outside the employee’s estate, avoiding inheritance tax, while the premiums themselves are generally treated as an allowable business expense for corporation tax purposes. Importantly, it does not count as a P11D benefit, so there is no additional income tax liability for the director or employee.

In practice, this means a company can provide a valuable benefit—life cover for its people—while achieving significant tax efficiency. For a high-earning director who might otherwise take additional income through salary or dividends to pay for personal cover, a Relevant Life plan can result in savings of 40–50% compared to an equivalent personal life insurance policy.

The aim of Relevant Life is simple: to protect the individual’s family in a way that is funded and administered by the company, with minimal tax friction. It does not exist to cover the company’s financial losses if that person dies—it’s about looking after loved ones, not balance sheets.

Understanding Key Person Insurance

Key Person Insurance, by contrast, exists to protect the business itself. It recognises that in many companies, particularly owner-managed firms, a small number of people hold the knowledge, relationships, or leadership that drive profitability. If one of those people were to die or become critically ill, the impact could be immediate—loss of revenue, contractual delays, or an inability to service debts.

This type of policy provides the company with a cash injection if such an event occurs. The funds can be used to offset lost income, repay loans, recruit replacements, or simply buy time to stabilise operations. Unlike Relevant Life, the company is both the owner and the beneficiary of the policy, and the payout goes directly to the business.

From a tax perspective, the treatment of Key Person Insurance is less clear-cut. Whether premiums are deductible depends on HMRC’s “wholly and exclusively” rule: they must be intended purely for business protection, not for the personal benefit of the insured. If that test is met, premiums may be allowable against corporation tax, but the payout is then usually taxable as trading income. If not, the premiums may not attract relief, though the payout could be received tax-free.

Either way, the purpose of Key Person cover is distinct—it is designed to preserve business continuity, not to support the personal estate of the insured.

The Core Differences Explained

While both policies involve a company paying premiums for life insurance, the underlying intention and outcome differ completely. The simplest way to distinguish them is to ask: who are you trying to protect?

If the goal is to look after the director’s family, the answer is Relevant Life. If the aim is to secure the business itself, it’s Key Person cover.

With Relevant Life, the beneficiaries are private individuals—the director’s spouse or children—receiving funds via a trust. With Key Person, the beneficiary is the business, receiving funds to replace income or capital.

The tax advantages are similarly different. Relevant Life’s structure is explicitly recognised by HMRC as a legitimate employee benefit, so the savings are clear and consistent. Key Person’s tax treatment is case-by-case and depends on purpose. In many cases, accountants will advise structuring both policies side by side: one for the director’s dependents, and one for the company’s resilience.

Common Misunderstandings Among Directors

Despite their clarity on paper, confusion between these policies is widespread. A common misconception is that Relevant Life will somehow compensate the company if a director dies. It will not—the payout goes solely to the insured’s beneficiaries. Conversely, many business owners assume Key Person Insurance provides a personal benefit for their family. Again, it doesn’t. The proceeds belong to the company and would form part of its assets.

Another frequent misunderstanding concerns eligibility. Some directors believe Relevant Life is available only to large employers with group life schemes. In fact, it was designed precisely for smaller businesses—even one-person limited companies—seeking a compliant, cost-efficient alternative.

Similarly, there’s confusion about trusts. Relevant Life must be written in trust to achieve its tax benefits. Key Person cover, however, usually should not be placed in trust, since the company is the rightful recipient.

At Willow Private Finance, we often see directors inadvertently reducing their tax efficiency by setting up the wrong policy, or by failing to document the intended purpose properly. That’s why specialist advice matters: small structural errors can have significant financial consequences.

When Both Policies Work Together

The most effective business protection strategies in 2025 rarely involve choosing one policy over the other. Instead, they combine the strengths of both.

For example, a limited company director might hold a Relevant Life plan to provide personal protection for their family, ensuring a tax-free lump sum passes outside their estate. At the same time, the company might maintain a Key Person policy to cover the potential loss of that director’s leadership and the financial risks to the business.

Together, the two policies create a ring of protection—one personal, one corporate—ensuring that both the household and the enterprise can survive a major shock.

This dual approach has become increasingly common as accountants and financial planners collaborate more closely with brokers like Willow. It aligns with the broader trend toward integrated wealth planning, where personal and corporate finances are treated as one ecosystem rather than isolated silos.

Tax Efficiency and HMRC Treatment in 2025

Tax efficiency remains one of the key reasons directors explore these policies. For Relevant Life, the rules are clearly defined and continue to offer one of the most attractive benefits available to owner-managed companies.

Premiums are typically deductible as a business expense, and because the policy benefits the employee rather than the company, there is no benefit-in-kind liability. The payout is made to the trust and therefore sits outside the estate for inheritance tax purposes. In effect, the director achieves a substantial amount of life cover using pre-tax company funds, without the usual personal or corporate tax burdens.

For Key Person cover, HMRC’s treatment continues to rely on the Anderson Rules, first outlined in 1944 but still relevant today. These state that if the insurance is taken out wholly and exclusively for business purposes—specifically, to protect trading income—the premiums are allowable against corporation tax, but any payout will be treated as taxable income. If the policy is instead used for capital protection, for example to secure loans, the reverse may apply.

The takeaway is simple: Relevant Life is consistent and predictable in its tax benefits, while Key Person is flexible but nuanced. Proper structuring, supported by advice from both a broker and an accountant, is crucial.

Challenges in Structuring Business Protection

As straightforward as these concepts may sound, real-world implementation can be complex. Many insurers have varying criteria for directors who are also majority shareholders. Some require minimum levels of salary or proof of employment to qualify for Relevant Life. Others may assess a company’s dependency level differently when underwriting Key Person cover.

Additionally, ensuring the correct trust documentation is in place remains essential. A Relevant Life policy not written into trust loses its core tax advantage, potentially pulling the payout into the deceased’s estate. Similarly, assigning a Key Person policy incorrectly—for example, naming the director personally instead of the business—could trigger unnecessary tax consequences.

Willow Private Finance works alongside clients’ accountants, legal advisers, and, when necessary, corporate tax specialists to ensure every element of these structures aligns. The goal is not just to obtain cover but to integrate it meaningfully into a company’s financial plan.

The 2025 Outlook

Looking ahead, the conversation around business protection is likely to deepen. HMRC continues to review benefit-in-kind boundaries and inheritance tax reliefs, meaning that poorly structured arrangements could face scrutiny. Meanwhile, lenders and investors increasingly expect to see formal risk management policies as a sign of sound governance.

For business owners and directors, the message is clear: Relevant Life and Key Person Insurance are not optional extras—they are foundational parts of a secure, well-governed company. Used together, they protect both people and profits, offering peace of mind that the business, the family, and the future are all taken care of.

How Willow Private Finance Can Help

At Willow Private Finance, we specialise in advising directors, contractors, and high-net-worth individuals on intelligent, tax-efficient protection structures. Our team compares policies from across the market, liaising with accountants and trustees to ensure every arrangement meets HMRC requirements and aligns with your wider wealth strategy.

Whether you’re setting up cover for the first time or reviewing existing policies, we’ll help you understand exactly what you need, why it matters, and how to make every pound work harder for you and your business.

Frequently Asked Questions

Q1: Can I hold both Relevant Life and Key Person cover?
A: Yes. Many directors combine both to protect their family and business simultaneously. Relevant Life provides personal family protection, while Key Person cover secures the company’s financial health.

Q2: Is Relevant Life available for company owners with no employees?
A: Yes, provided the director is classed as an employee of their own limited company. It’s ideal for one-person firms.

Q3: Does Relevant Life include critical illness cover?
A: Not usually. Relevant Life provides death or terminal illness benefit only. Critical illness is typically arranged separately.

Q4: Are Key Person premiums tax-deductible?
A: Sometimes. HMRC applies the “wholly and exclusively” rule—if the cover protects trading income, premiums may qualify for relief.



Q5: Do I need a trust for Key Person cover?
A: No. Trusts are specific to Relevant Life policies; Key Person proceeds are paid directly to the business.

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