How to set up relevant life insurance
A relevant life insurance policy is arranged by a limited company for a director or employee, with premiums typically paid by the business rather than the individual.
The process is usually straightforward, but there are a few important stages to follow — from deciding how much cover is needed to completing the trust documentation and starting the policy.
This guide explains how relevant life insurance works from start to finish.
Relevant life insurance normally involves five main steps: deciding the level of cover required, comparing insurers, completing the application and underwriting process, placing the policy in trust, and arranging payment from the company.
Most directors arrange the policy through an adviser, who can compare insurers, manage the application and help ensure the trust documentation is completed correctly.
To get started, we recommend you read our relevant life FAQ and 12 key facts.
How the process works
1
Choose your cover
Work out how much protection your family or dependants may need.
2
Compare insurers
Review premiums, policy terms, cover limits and underwriting criteria.
4
Put the policy in trust
Set up the trust so the payout can pass to your chosen beneficiaries.
5
Start the policy
The company begins paying the premiums and the cover comes into force.
1. Decide how much cover you need
Start by estimating the amount of cover your family or dependants would require if you died during the policy term.
Many directors base this on a multiple of annual income — for example, 10–25× salary and dividends — or on an amount sufficient to clear mortgages and loans while providing ongoing financial support for dependants.
The amount available will also depend on the insurer, the director’s age and the evidence of remuneration provided. See our guide to relevant life insurance age limits.
You can estimate a suitable level of cover using the relevant life insurance calculator.
Once you have a reasonable idea of the cover required, the next step is to compare insurers.
2. Compare insurers and premiums
An independent financial adviser (IFA) can compare providers and policy terms across the market.
Each insurer has different limits on cover levels, maximum entry ages, policy features and medical underwriting requirements. Different providers may also assess salary, dividends and total remuneration in slightly different ways.
An adviser can identify which insurers offer relevant life policies, obtain quotations and manage the paperwork. You can also review our overview of the main relevant life insurance providers.
To understand what affects pricing, see what determines the cost of relevant life premiums.
The premiums may offer significant tax advantages compared with paying for personal cover from post-tax income. Our separate guide covers the tax benefits of relevant life insurance.
Once an insurer and policy have been selected, the director or employee completes the application.
3. Complete the application and medical questions
The director or employee completes an application containing personal details, occupation, and medical history.
The insurer may ask about existing health conditions, medication, smoking, alcohol consumption, family medical history and any higher-risk hobbies or activities.
For larger sums assured, insurers may request additional underwriting, such as a nurse screening, a blood test, or a GP report.
Once underwriting is complete, the insurer will confirm whether it can offer cover and on what terms. It may accept the application at the original premium, offer revised terms or request further evidence.
Straightforward applications can sometimes be completed within a few days. Applications involving higher levels of cover or additional medical evidence will usually take longer.
See also who can take out a relevant life policy.
After the insurer accepts the application, the policy needs to be placed in trust.
4. Put the policy in trust
Every relevant life plan must be written under a discretionary trust. This ensures that if a claim occurs, the payout goes to the trustees rather than to the company or the director’s estate.
The trustees then distribute the money to the intended beneficiaries.
The structure works broadly as follows:
Limited company → relevant life policy → trustees → beneficiaries
An adviser normally prepares the trust documentation and arranges for it to be signed electronically or on paper. The employee will usually complete a nomination or expression-of-wishes form identifying the people they would like to benefit.
The trust is important because it helps keep the payout outside the employee’s estate for Inheritance Tax purposes. You can read more in our guides to relevant life insurance trusts and relevant life insurance and Inheritance Tax.
Once the trust documents are completed, the policy can begin.
5. Start the policy and set up payments
Once the application has been accepted and the trust documentation is in place, the policy becomes active from the agreed start date.
The company then pays the premiums monthly or annually from its business bank account. The policy remains in force while premiums are paid and the policy conditions are met.
In many cases, the premiums qualify as a business expense for Corporation Tax purposes, provided the policy meets the relevant conditions. See whether relevant life insurance counts as a business expense and how the wholly and exclusively rule applies.
Relevant life premiums are not normally treated as a benefit in kind and do not usually need to be reported on a P11D.
What happens after the policy starts?
The company continues paying the premiums for the agreed policy term. The director should review the level of cover occasionally, particularly after taking on a larger mortgage, increasing their income or making other significant changes to their family’s finances.
It may be possible to increase or decrease the amount of cover, though an increase may require further underwriting.
A director can also hold more than one relevant life policy if the total amount of cover remains reasonable in relation to their remuneration.
If the director leaves the business, closes the company or moves to another employer, the policy may be transferable. See what happens to relevant life insurance when you change companies.
If the insured person dies while the policy is active, the insurer pays the lump sum to the trustees. The trustees then distribute the money to the beneficiaries in line with the trust and the employee’s wishes.
What relevant life insurance does not cover
A standard relevant life policy provides life cover. It does not normally pay out because the director is unable to work, loses a contract or becomes unemployed.
Some insurers may offer terminal illness benefits, but critical illness and income protection are separate types of cover. See whether you can include critical illness cover and our comparison of income protection and relevant life insurance.
Ready to compare policies?
The first practical step is to decide roughly how much cover is required. You can then compare quotations, policy features and underwriting terms from suitable insurers.