Relevant life insurance and terminal illness
Relevant life insurance is designed to provide a lump sum if the insured employee or director dies during the policy term.
Some policies also include a terminal illness benefit.
Although the two are often mentioned together, they are not the same thing.
A terminal illness benefit allows the policy to pay out while the insured person is still alive if certain conditions are met.
If you’re considering relevant life insurance through your limited company, it’s worth understanding how terminal illness cover works and what it does – and doesn’t – provide.
If you’re new to relevant life insurance, start with our guide to what relevant life insurance is.
Many relevant life insurance policies include a terminal illness benefit, although this depends on the insurer and policy terms. Where available, the benefit may allow the policy to pay out before death if the insured person is diagnosed with a qualifying terminal illness during the policy term.
What is terminal illness benefit?
Terminal illness benefit is an additional feature included with many life insurance policies.
Rather than waiting until death, the insurer may pay the policy proceeds early if the insured person is diagnosed with a qualifying terminal illness.
The payment is usually made only if the policy definition is satisfied.
That definition is set by the insurer rather than by HMRC.
Does every relevant life policy include it?
No.
Many insurers include terminal illness benefit as standard.
Others may offer it as an optional feature or apply different conditions.
This is one reason it is worth comparing providers rather than looking solely at the monthly premium.
Our guide to relevant life insurance providers explains why policy features can differ.
How is terminal illness defined?
There is no single definition that applies across the market.
Most insurers require medical evidence that the insured person has been diagnosed with a terminal illness meeting the policy definition.
Many policies also require a medical opinion that life expectancy is limited.
The exact wording should always be checked before taking out cover.
Is terminal illness the same as critical illness?
No.
The two are often confused.
Terminal illness benefit is linked to a life insurance policy.
Critical illness cover pays if the insured person is diagnosed with one of a specified list of medical conditions during the policy term.
Relevant life insurance cannot normally include critical illness cover within the same qualifying policy.
You can read more in our guide to can you include critical illness cover?.
How is a terminal illness claim paid?
If the policy includes terminal illness benefit and the insurer accepts the claim, the benefit is normally paid during the insured person’s lifetime.
Once the payment has been made, the policy usually ends because the full benefit has already been paid.
The insurer will explain what medical evidence is required before reaching a decision.
Does terminal illness affect the tax treatment?
The inclusion of terminal illness benefit does not automatically prevent a policy from qualifying as relevant life insurance.
However, the policy must still satisfy the legislative conditions applying to relevant life insurance.
Those conditions are explained in our guide to HMRC’s rules on relevant life insurance.
HMRC also explains the income tax treatment of qualifying relevant life policies in its Employment Income Manual.
HMRC Employment Income Manual – EIM15045
Does age matter?
Yes.
Like the underlying life insurance policy, terminal illness benefit normally only applies while the policy remains in force.
Relevant life policies intended to qualify for the usual favourable tax treatment must also comply with HMRC’s age 75 rules.
You can read more in:
Does underwriting consider existing medical conditions?
Yes.
Like any life insurance policy, relevant life insurance is normally underwritten before cover begins.
The insurer may ask about your medical history, lifestyle and existing health conditions before deciding whether to offer cover.
You can read more in our guide to how the underwriting process works.
Should terminal illness benefit influence which insurer you choose?
It can.
Premiums are important, but they are only one part of the decision.
The policy definition, underwriting approach and additional features may all differ between insurers.
Looking at the overall policy rather than simply choosing the lowest premium often leads to a better long-term outcome.
Frequently asked questions
Does relevant life insurance include terminal illness cover?
Many policies do, although not every insurer provides the benefit in exactly the same way. Always check the policy documentation before applying.
Is terminal illness the same as critical illness?
No. Terminal illness benefit is different from critical illness cover and the two should not be confused.
Will the policy pay before death?
If the policy includes terminal illness benefit and the insurer accepts the claim, payment may be made during the insured person’s lifetime.
Does terminal illness benefit affect the tax advantages?
Not by itself. The policy must still satisfy the legislative requirements for qualifying relevant life insurance.
Get a quote
If you’re comparing relevant life insurance policies, you can request a quote or use our relevant life insurance calculator to estimate an appropriate level of cover.