Critical illness cover for a business is normally an option added to a business protection policy, not a product of its own. It pays a lump sum to the company, or to the other owners, if the person insured is diagnosed with one of the illnesses the policy lists and the claim is valid. If you are weighing it for your own firm, an FCA-authorised broker can explain what the option would add, and the form on this page sends that free call-back request.

The two arrangements where it matters most are key person cover and shareholder protection. This page sets out how each works once critical illness is added, then the tax points HMRC and the providers raise.

What does critical illness add to business protection?

Legal & General’s key person page (read 26 October 2026) describes its policy as safeguarding a company against the financial impact of death, terminal illness (if life expectancy is under 12 months), or "a specified critical illness (if chosen for an extra cost at the outset)" of a key person. So the illness cover is a choice made when the policy starts, and it costs more.

The reason a business might want the extra layer is put in Legal & General’s technical guide for advisers (W13226 06/26): "The effect of being diagnosed with a critical illness can be the same on the business as the death of the key person." Our critical illness guide shows how definitions and payouts work; life and critical illness cover covers how the two benefits are combined.

How does key person critical illness insurance work?

The company is the policyholder. Legal & General says the employer owns the policy and pays for it, so any payout goes to the employer, and Royal London’s guidance for advisers (September 2025) describes the same set-up. Our guide to who owns key person insurance goes into ownership and what happens if the person leaves.

Two conditions come with it. The business has to show a financial loss of profits if the key person were absent, and the person covered has to agree. Legal & General’s adviser guide adds that they give their own personal and medical details and sign the application as the life insured.

A critical illness claim can end differently from a death claim. Royal London’s guidance says: "In the case of a critical illness claim, it’s possible the key person will return to work, so the funds could be used to pay a temporary replacement or replace lost profits."

On size, the adviser guides give rules of thumb, not limits on what a company can buy: a multiple of gross salary that might be up to 10 times for life cover and up to 5 times for critical illness cover (Royal London), and a lower figure for critical illness than for death (Legal & General). How to calculate key person insurance goes through the methods, and what key person insurance is for covers the basics.

How does shareholder protection work with critical illness cover?

Shareholder protection is built around an agreement between the owners and a policy on each owner’s life, which our shareholder protection guide explains. Adding critical illness changes who has the choice. Legal & General’s share protection guide (W13813 02/26, written for advisers) sets out three points that differ from a death claim:

  • The ill owner holds the option to sell. The guide says: "There is NOT an option for the other owners to buy the share of the business from the critically ill owner."
  • The time limit runs from the payout. The option is open for six months after the proceeds are received, not from the date of diagnosis.
  • The policy ends. "On payment of a valid critical illness claim no further benefits will be payable and the policy will end."

Other providers describe other set-ups, so these are Legal & General’s terms, not a general rule. Royal London’s guidance for advisers (September 2025) says: "For critical illness it is also possible for the agreement to give the person suffering a critical illness the option to sell immediately." The other owners’ option, it adds, would typically be deferred for 12 months and usable only if the ill person has not returned to work in that time. In the arrangement both providers describe, each owner’s own policy is written in trust for the other owners; our guide to critical illness cover in trust covers that.

Vitality’s adviser page for shareholder and partnership protection lists Business Serious Illness Cover as an option, which pays a share of the cover amount for each claim rather than the whole sum every time. For a view on how the critical illness option fits a shareholder agreement, a broker can talk it over on a call-back, free of charge, requested by the form on this page.

What do HMRC and the providers say about tax on business critical illness cover?

This is the general position as published, which can change, and not tax advice; the company’s accountant has the last word. For key person cover, HMRC’s Business Income Manual (BIM45525, read 26 October 2026) says "An employer may take out in their own favour a policy insuring against loss of profits resulting from the death, critical illness, sickness, accident or injury of an employee, director or other ‘key person’". Premiums are allowable if all of its conditions are met, the first being 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".

The same page says that "critical illness or accident policies with an investment content - such that premiums contribute to a capital investment - are capital expenditure and will not be deductible". A second HMRC page (BIM45530) lists circumstances in which a key person policy may have a non-trade purpose, one being a policy covering directors who are major shareholders while other employees are left out. For shareholder protection the question is different: is shareholder protection tax deductible covers it, and key person insurance and tax covers the key person side.

Two provider notes in adviser material are specific to illness. Legal & General’s share protection guide says: "A Capital Gains Tax liability may arise, in the event of the sale of an owner’s share of the business due to a terminal or critical illness." Royal London’s guidance says an income tax charge under the Pre-Owned Asset Tax rules could arise where a critical illness payout stays held in trust under an own-life plan. Whether either applies depends on the arrangement.

Can a limited company buy critical illness cover for its directors?

A company can insure a director as a key person, as above, and owners can cover each other through shareholder protection. A director’s own personal critical illness policy, paid for by the company, is a different question: how a company could arrange and account for one is for its accountant to answer, and the broker can explain the policy side at no charge.

Relevant life cover is the other business route people ask about. Aviva’s key features (EDCO1771 0126) say it "pays out a lump sum to the employee covered or their beneficiaries if they die or are diagnosed with a terminal illness while employed during the policy term", and counts a single director of a limited company on PAYE as an employee. Legal & General’s summary (QGI12848 2026/10) names the same two. Key person against relevant life cover sets out the differences.

Directors who work for themselves rather than through a company have other routes: see cover for the self-employed and income protection for business owners. For the wider picture, business protection insurance in the UK covers the rest. The person insured also answers health questions, so their history shapes what is offered; life insurance with medical conditions explains how insurers assess it.

Pricing the critical illness option next to plain life cover for the same person is a comparison a broker makes by phone, and you can ask for one by submitting the form on this page.

Frequently asked questions

Can relevant life cover include critical illness?

The relevant life plans from Aviva and Legal & General pay out on death or a terminal illness diagnosis, as their key features and policy summary set out. Whether any insurer offers an illness add-on to relevant life is a point the broker can settle when they ring you back.

Does Vitality offer serious illness cover for businesses?

Its adviser pages list Business Serious Illness Cover as an option on its business protection plans, paying a share of the cover amount for each claim. The pages say a plan cannot carry both this option and its Disability Cover for Business.

Does the key person have to agree to the policy?

Yes. Legal & General says key person insurance is taken out with the agreement of the person covered, and its adviser guide says they sign the application as the life insured.

Who receives a business critical illness payout?

Under key person cover, the company, as owner of the policy. Under shareholder protection in Legal & General’s set-up, the other owners receive it, through a trust.

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