Relevant Life Insurance
Death-in-service cover
for small companies.
Relevant life insurance is a death-in-service policy for a single employee or director, paid for by the company. It gives small businesses the benefit that large employers provide through a group scheme, without needing a scheme at all.
Because it is structured as an employee benefit rather than personal cover, the premium is normally an allowable business expense and is not usually treated as a benefit in kind, which makes it markedly more efficient than a director paying for life cover personally out of taxed income.
For the full detail, read our relevant life insurance guide →
What is relevant life insurance?
Relevant life insurance is a term life policy taken out by a company on the life of an individual employee, including a salaried director. The company owns and pays for the policy; the benefit is written in trust for the individual's family.
It exists to give smaller employers a way of providing death-in-service cover without running a registered group life scheme, which is generally impractical below a reasonable number of employees. A single director can have one.
On death during the term, the sum assured is paid to the trustees and then to the named beneficiaries. It does not go to the company, which is what distinguishes it from key person insurance.
Why it is tax-efficient
Consider a director who wants £500,000 of life cover. Paying for it personally means using income that has already suffered income tax and National Insurance, and the company has paid employer's NI on that salary too.
Arranged as relevant life cover, the premium is normally an allowable business expense for corporation tax purposes, provided it meets the wholly and exclusively test. It is generally not assessed as a benefit in kind on the individual, and there is normally no National Insurance on it.
The combined effect is that the same cover typically costs the director substantially less in real terms. The precise saving depends on your tax position and the company's. Tax treatment depends on your individual circumstances and may change in the future.
Who qualifies
The individual must be an employee of the company, which includes salaried directors. The policy must provide death benefits only, with terminal illness generally permitted, and must not have a surrender value or any investment element.
Cover must end before age 75, the benefit must be paid through a discretionary trust to the individual's family or estate, and the arrangement must not be set up mainly for tax avoidance.
Sole traders and equity partners in a partnership are not employees of the business and so generally cannot be covered by a relevant life policy. They would use personal life insurance instead.
Relevant life vs personal life insurance
The cover itself is much the same, a lump sum on death within the term. The differences are in who pays and how it is treated.
Personal cover is paid from taxed income, is entirely within your control, and continues regardless of where you work. Relevant life cover is paid by the company with the tax advantages above, but it is tied to your employment: if you leave, the policy generally has to be transferred to you personally or it ends.
Many directors hold both, relevant life cover for the bulk of the protection while they control the company, and a personal policy that is independent of it.
Setting it up in trust
The trust is not optional decoration; it is a condition of the arrangement qualifying. The policy must be written into a discretionary trust from the outset, with the individual's family or estate as potential beneficiaries.
Done properly, the proceeds pass outside the individual's estate for inheritance tax, reach the family without waiting for probate, and never touch the company's balance sheet. Done badly, or not at all, the tax treatment can fail entirely.
Tax treatment depends on your individual circumstances and may change in the future. Cover Your Family is not FCA regulated and does not arrange policies. A separate, FCA-regulated adviser will set this up correctly with the right trust wording.
Who needs it
You should consider relevant life insurance if…
- ✓You are a salaried director of a limited company with no death-in-service cover
- ✓You currently pay for personal life insurance out of taxed income
- ✓Your company is too small to justify a registered group life scheme
- ✓You want to provide death-in-service cover for one or two key employees
- ✓You have a large pension pot and want cover that sits outside it
- ✓You are a contractor operating through your own limited company
Key benefits
Why it matters
Paid by the company
The premium comes out of company money rather than the director's taxed income, which is where the efficiency comes from.
Normally an allowable expense
Premiums can usually be deducted for corporation tax where they meet the wholly and exclusively test. Tax treatment depends on your individual circumstances and may change in the future.
Not usually a benefit in kind
The individual is generally not taxed on the premiums and there is normally no National Insurance, unlike most company-paid personal benefits.
Available to a single employee
Unlike a group life scheme, a relevant life policy can cover one director, which makes it workable for very small companies.
Paid to the family, in trust
The benefit goes to the individual's family through a discretionary trust, outside the estate for inheritance tax and without waiting for probate.
Sits outside the pension
Because it is not a registered pension arrangement, the benefit does not interact with pension allowances in the way older schemes could.
Key considerations
Things to weigh up before you apply
Relevant Life Insurancecan be valuable, but it isn't right for everyone in every situation. Cover is subject to underwriting, and a policy only pays out if it is kept up to date and set up correctly, so it's worth understanding the limitations before you decide.
- !The cover is tied to your employment; leaving the company generally means transferring the policy or losing it.
- !Sole traders and equity partners are not employees and so cannot usually be covered.
- !The policy must be death-benefit only, with no surrender value and no investment element.
- !Cover has to end before age 75, so it is not a substitute for whole of life cover.
- !The discretionary trust is a condition of qualifying, not an optional extra, get the wording wrong and the tax treatment can fail.
- !The tax advantages depend on your own and the company's circumstances, and on the rules staying as they are.
FAQ
Common questions about relevant life insurance
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