Do limited company directors need income protection or relevant life insurance?

Relevant life insurance and income protection are often discussed together, but they do very different things.

One pays us a lump sum if you die, whereas the other provides a regular income if you can’t work due to sickness or injury.

If you’re a limited company director, the question isn’t which policy is ‘better’, but whether you need one, the other, or both.

What relevant life insurance covers

A relevant life policy is set up by a limited company to provide life cover for a director or employee.

If the insured person dies during the policy term, the policy pays out a lump sum into a trust for their beneficiaries.

Most policies also include terminal illness cover.

One of the main benefits is that premiums are usually paid by the company and can be treated as a legitimate business expense, providing a tax benefit compared to taking out a personal life policy.

The proceeds are normally free of income tax (for the beneficiaries), and do not form part of the deceased’s estate for inheritance tax purposes.

You can read more about the tax treatment of relevant life here.

What income protection covers

Income protection provides a regular monthly payment if you’re unable to work as a result of sickness or injury.

It provides an ongoing source of income, rather than a one-off lump sum, usually until you recover, return to work, or reach the end of the policy term.

A typical IP policy might replace a fixed percentage of your income following a waiting (deferred) period.

Income protection is often arranged on a personal basis.

It can also be set up through a company using an executive income protection policy, where the company pays the premiums and receives the benefit, which is then paid to you as taxable income.

This means the company may receive Corporation Tax relief on the premiums, but any payout is usually taxed in the same way as salary.

Side-by-side comparison

	Relevant life insurance	Income protection
Main purpose	Provides a lump sum on death	Replaces income if you cannot work
Type of payout	One-off payment	Monthly income
When it pays	Death or terminal illness	Illness or injury preventing work
Who sets it up	Limited company	Often the individual (or via the company under an executive policy)
Tax treatment	Often tax-efficient via the company	Premiums may be company-paid, but payouts are usually taxable
Covers loss of earnings	No	Yes

When you might use each one

Relevant life insurance is designed to protect your family if you die while the policy is in force. It is often used by directors who do not have access to a traditional employer death-in-service scheme.

Income protection is aimed at protecting your own income if you are unable to work due to injury or sickness.

It is a different risk, but it addresses an immediate concern.

For this reason, many directors end up taking out both types of policy.

One covers the long-term financial impact on their family. The other covers day-to-day income if something goes wrong while they are still working.

Which one is more important?

This depends entirely on your personal circumstances.

If your main concern is making sure your family is financially secure if you die, relevant life insurance is usually a prudent place to start.

If your main concern is how to fund your life if you are unable to work for an extended period, income protection addresses that immediate concern.

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