Relevant life insurance – frequently asked questions

Relevant life insurance is a tax-efficient way to provide life cover to employees. It offers numerous benefits to both your limited company and its directors. In this guide, we answer some of the most asked questions by company directors.

To find out more and to get a quote, read our guide to relevant life insurance for directors.

What is relevant life insurance?

It is a type of death-in-service benefit that offers numerous advantages for both employers and employees.

A relevant life policy (RLP) provides a lump sum, via a discretionary trust, to benefit employees’ dependants if an employee dies while the policy is live. Unlike traditional life insurance, the employer (usually a limited company) pays the premiums.

You can read HMRC’s definition of how life assurance policies are treated in HMRC’s Business Income Manual (BIM45525).

What does the term ‘relevant life’ mean?

The term comes from the legal definition of a relevant policy. You can read the full text in Sections 480 to 482 Income Tax (Trading and Other Income) Act 2005 here.

To paraphrase this definition, a payment from a standard employer’s life policy is usually taxable, as it constitutes a ‘relevant benefit’ under an employer-financed retirement benefits scheme.

However, a payment is not chargeable if it is made from a relevant life policy.

A relevant life policy must be set up in a specific way to meet this definition — see how to set up relevant life insurance.

Can anyone take out a relevant life policy?

This type of plan is aimed at small businesses that can’t qualify for a group scheme. Most RLP providers only insure limited companies, not sole traders – unless the sole trader has employees.

Can my limited company set up a group scheme instead?

No, a group life insurance needs to cover a minimum of five individuals. The concept of relevant life was created in 2006 specifically to provide the benefits of group schemes to smaller companies.

How much tax will I save compared to a personal policy?

The tax benefits of relevant life are one of its key features. The percentage of tax savings depends on various factors, including the employee’s income tax band and the company’s Corporation Tax effective rate. Read more in tax benefits of relevant life insurance.

High-earning company directors can save over 50% by taking out a company policy compared to paying for a personal policy out of post-tax income.

Can premiums be offset against Corporation Tax?

Yes, in most cases HMRC treats premiums as an allowable business expense. This means they can be offset against a company’s profits for Corporation Tax purposes. See is relevant life a business expense? for the conditions that apply.

What is the Inheritance Tax (IHT) status?

The funds left to the policy beneficiaries do not form part of the employee’s estate, as the trustees, not the individual, own the plan. This is one of the reasons relevant life policies are written into a discretionary trust.

Do premiums affect an employee’s pension allowances?

No, relevant life plans do not fall under pensions legislation. Policy premiums do not affect an employee’s annual or lifetime pension allowances. From April 2024, the pension lifetime allowance has been abolished, removing a previous concern for high earners.

Do relevant life premiums attract a benefit in kind charge?

No. Even though the policy is taken out to ultimately benefit the individual, it benefits the business by protecting key employees. Therefore there is no benefit-in-kind charge, or need to report the premiums on a P11D.

This means the company does not pay employers’ NICs, and the employee pays no additional income tax on the value of the benefit.

How much cover can an employee get?

The maximum amount of cover an employee can get is worked out as a multiple of total remuneration. This includes salary, dividends, benefits in kind and bonuses. The multiples vary between insurers, but can be around 30× remuneration for employees under 40 years old, 20× for 40–49 year olds, and 15× for the over 50s.

What happens if an employee leaves the company?

Most policies are completely portable, so can be transferred to a new employer. There must be no break in premiums, and the policy needs to be ported between employers to retain its relevant life status. See what happens if you leave your company for how this works in practice.

How much do relevant life policies cost?

Understandably, premium costs are based on risk, and subject to factors such as:

• the amount of cover required
• the employee’s age
• the employee’s health
• the employee’s occupation and hobbies
• whether you choose increasing or level cover
• whether you have reviewable or guaranteed premiums

Given the number of possible factors listed above, the only way to get an accurate quote is to contact an Independent Financial Adviser (IFA). IFAs can scan the market and easily compare quotes.

Here are some examples – from a leading insurer we work with at RLI. These are the monthly premiums paid by a limited company to insure an employee:

For the above examples, if you double the amount of cover, the monthly premiums will usually increase by a similar proportion.

Are there any age limits?

Policies typically cover employees from the age of 18 up to 75.

Can you provide an RLP to employees via a salary sacrifice arrangement?

Yes, this is possible. However, the premiums are no longer tax-deductible if you do this. Tax efficiency is one of the key benefits of this type of insurance, so this isn’t advisable.

What happens if my company stops paying the premiums?

Unlike some other products – such as pensions, there is no surrender value if the company stops paying the premiums. This means that the policy is active for as long as the premiums are paid and the insurance conditions are maintained. If you stop paying the premiums or breach the policy terms, there is no cash-in value.

Who are the trustees?

The trustees are the legal owners of the RLP and will be in charge of the funds if a successful claim is made. Trustees must always act in the beneficiaries’ best interests, although they have some discretion over how the funds are used. The employer is automatically made a trustee but can opt out of this role. You can appoint other trustees, collectively known as ‘additional trustees’. These should be people you trust, such as family members, or you can appoint a professional adviser. See more about this in trusts and relevant life policies.

Discretionary trusts – what paperwork is involved?

It is relatively simple to set up a new RLP. There are two key documents to complete – the trust deed and a nomination form. The trust deed is the legal document that establishes the trust. It is signed by the settlor (the limited company) and the trustees, and all signatures must be witnessed. The nomination form states who the beneficiaries are and the proportion of the benefit they should receive. The employee should sign and date the form.

What happens if the employee dies?

If the policy is still in effect, the benefit is paid to the trustees of the RLP trust by the insurance company. Using their discretion, the trustees then distribute the funds to the beneficiaries named in the trust.

Does relevant life provide critical illness benefits?

No. An RLP pays out a lump sum to benefit the named employee’s dependants. It does not cover sickness, injury, or loss of employment. Speak to your IFA if you require critical illness or income protection.

What happens if the employee is alive when the policy ends?

There is no surrender value at any time with this type of policy. If you reach the upper limit age (typically 75), the company stops paying the premiums, and the cover ends.

Will my premiums change over the life of the policy?

This is up to you. With level cover, your payments increase over time, to account for the effects of inflation. With decreasing cover, your premiums stay the same for the lifetime of your policy. Premiums tend to be lower for decreasing cover arrangements than level cover.

Can life insurance be used to pay off a mortgage?

Beneficiaries can use the lump sum for any purpose, including paying off a mortgage. If you increase your mortgage borrowing at any stage, ensuring that your life cover remains sufficient to repay the loan makes sense.

When is an RLP the wrong choice?

In some specific cases, an RLP is not an appropriate choice. For example, if the person to be insured is not an employee, or if they are 75 or older.