Why people insurance should be part of the farm business plan

More farmers are insuring against death and illness, whether for themselves and their families or for employees, or for both.

The inheritance tax relief (IHT) changes have prompted many with assets to consider taking life cover, either for a set period or through a whole-of-life policy, in order to provide a fund to cover the risk of an IHT liability.

When assets are gifted, there is no IHT as long as the giver survives for seven years. Such gifts are known as potentially exempt transfers. This period can be covered by insurance, with the sum at risk, and therefore the cost of cover, decreasing as the IHT liability reduces after the third year from the date of the gift, through the application of taper relief.

See also: How to assess farm values and avoid being underinsured

Insurance called level term cover can be useful particularly if you plan to pass on assets but the recipients are still too young to receive them, says Sean McCann, a chartered financial planner with the NFU Mutual.

“This is used if it is too early to gift assets, it provides a lump sum to help meet any potential inheritance tax liability, giving time to plan succession.”

This covers a life for a set number of years, determined by the gifting plan, and provided the person covered survives through that period, the cover finishes at the end of that term.

IHT, potentially exempt transfers and taper relief

Gifts are exempt from IHT if the giver survives for seven years from the date of the gift. The potential IHT liability reduces on gifts over £325,000 after the end of year three, through taper relief.

Employee and business benefits

A competitive recruitment market and a desire to offer work-related benefits has prompted more employers to insure against the death and illness of those working in the business. One way to do this is through relevant life cover, which provides a death-in-service payment for any employee, including directors, up to the age of 74.

The NFU Mutual saw a 25% increase in the number of this type of policy taken up between 2023 and 2025, and it has continued to grow.

“This is designed to replicate what many bigger employers offer their employees,” says Sean, who thinks that many employers, including directors of farming companies who could benefit personally from it, are unaware of this type of cover and its tax efficiency.

The tax efficiency stems from the fact that premiums are an allowable business expense but employees are not taxed on it as a benefit in kind.

“From the employer’s perspective it is a running expense, but also there is no employer’s or employee national insurance on it,” says Sean. “For example, if you wanted to reward an employee with a £1,000 pay rise, it would cost the employer £1,150 because of employer national insurance [NI].”

As well as offering a death-in-service benefit to the employee’s family, this type of cover also pays out directly to the employee if they are diagnosed with a terminal illness, which for this purpose is an illness as a result of which they are expected to survive for less than 12 months.

Policies should be written in trust to keep payouts outside the IHT net.  

Key person

Key person insurance covers the death or prolonged absence through illness of someone who is important to the operation of a business.

This could be an employee or the owner of the enterprise, where the loss of their skills or experience would cause real commercial problems.

Aside from the stress and increased workload such a loss or absence causes, it can affect staff morale and the perception of the business by suppliers and customers.

The money resulting from a claim is paid out to the business and can be used to replace lost profit and to recruit a replacement, says Sean. 

This type of insurance can cover the death of the individual, a terminal diagnosis or a critical illness covered by the policy.

It is generally taken out for a specified term, depending on the length of time for which the business needs protection – for example five or 10 years.

The cover ceases at the end of the agreed term.

When calculating how much cover is needed, aspects to consider include:

• What it would cost to replace the person, possibly including recruitment agency and relocation costs.
• The earnings of the person to be covered – for example up to 10 times their annual earnings for life cover.
• How long it might take to recover profits lost as a result to the key person no longer being in their role.

Most commonly, there is no tax relief for the business on the cost of key person insurance, but nor is the payout taxable, says Sean. However, the tax treatment will depend on the circumstances.

Group life cover

A simple but popular method of offering life cover to employees is to take out what is known as group life cover, which covers anyone actively working in the business, up to state pension age.

This is a death in service benefit and the advantage of this type of cover is that up to a certain sum, known as the free cover limit, it requires no medical assessments or history. Also, it can be offset as a business expense but it is not taxed on the employee as a benefit in kind, nor is any NI due.

The lump sum paid out is is usually based on a multiple of the employee’s salary and most often is IHT free, provided the policy is written in trust.

Group life cover can be arranged for a minimum of two people and is the most common benefit offered to employees, says Betts Wood, senior employee benefits consultant with insurance broker Brown & Brown.

Insurers commonly offer additional benefits alongside this life cover, she says, including 24-hour access to a general practitioner and mental health advice.  

The premium will be dependent on the salary, the amount insured, age and any travel.

Where more cover is needed than the sum offered by the free cover limit, then medical assessments would be needed.