Relevant life insurance claims – how does a payout work?

Relevant life insurance is designed to provide a lump sum if the person covered dies while the policy is in force, with some policies also paying out following a qualifying terminal illness diagnosis. But who actually receives the money when a claim is made?

Unlike a personal life insurance policy held in your own name, a relevant life policy is normally written into trust from the outset. This means the insurer usually pays a successful claim to the trustees, who are then responsible for dealing with the money.

In this guide, we explain how a relevant life insurance claim works, who receives the payout and what the trustees need to do.

Who makes a relevant life insurance claim?

If the person covered dies, the trustees will normally contact the insurer to start the claim.

The claims process varies between insurers. Once a claim has been registered, the insurer will tell the trustees what information and documents it needs to assess the claim.

For a death claim, this usually includes the death certificate and policy details. Further information may be required depending on the circumstances of the claim.

Keep the policy and trust documents somewhere the trustees can easily find them if a claim needs to be made.

Where is the payment made?

The insurer doesn’t normally pay the money to the limited company.

Instead, the payout is made to the trustees of the relevant life trust.

The trustees then deal with the money in accordance with the terms of the trust.

This is an important difference between relevant life insurance and key person insurance.

Key person insurance is designed to protect the business itself, so the company can receive the proceeds of a successful claim.

Relevant life insurance is an employee benefit. Its purpose is to provide life cover for the employee or director and ultimately benefit their family or other permitted beneficiaries.

What do the trustees do with the money?

When a claim is accepted, the insurer pays the money to the trustees, who then decide how it should be distributed under the terms of the trust.

Relevant life policies commonly use a discretionary trust. This gives the trustees some discretion over which eligible beneficiaries receive the money and when it is paid.

The person covered will usually have completed a nomination form or expression of wishes indicating who they would like to benefit.

The trustees should take these wishes into account, although the trust document ultimately governs how they can deal with the money.

Depending on the terms of the trust, the trustees may be able to distribute the money to the beneficiaries or retain it within the trust.

For more information on how this arrangement works, read our guide to trusts and relevant life policies.

Does the payout go through the company’s accounts?

The payout wouldn’t normally go through the limited company’s accounts.

Although the company originally takes out the relevant life policy and pays the premiums, the policy is placed into trust.

If the claim is successful, the insurer pays the lump sum to the trustees rather than to the limited company.

The money is therefore not a payment to the company for the loss of its director or employee.

This is another reason not to confuse relevant life insurance with key person cover.

Is a relevant life insurance payout taxable?

A relevant life payout made correctly through the trust will normally be paid without Income Tax or Capital Gains Tax being charged on the claim proceeds.

The Inheritance Tax position is also one of the main reasons relevant life policies are written into trust.

The payout will not normally form part of the deceased employee’s estate for Inheritance Tax purposes.

However, this doesn’t mean that a discretionary trust can never have an Inheritance Tax liability. If money remains in the trust for a long period, the normal tax rules that apply to discretionary trusts may become relevant.

Read our separate guide to relevant life insurance and Inheritance Tax for more information.

What happens with a terminal illness claim?

Some relevant life policies include terminal illness cover.

This allows a claim to be made while the insured person is still alive if they meet the insurer’s definition of terminal illness.

The exact definition and claim conditions will be set out in the policy.

How the proceeds are dealt with will also depend on the terms of the relevant life policy and trust. Depending on the arrangement, some or all of the terminal illness benefit may be payable to the benefit of the covered person.

For more information, read our guide to relevant life insurance and terminal illness.

Can an insurer refuse a relevant life claim?

It can, although the circumstances will depend on the policy.

A claim may not be paid if the event isn’t covered by the policy or a specific exclusion applies.

For terminal illness claims, the diagnosis must meet the definition contained in the policy.

The insurer may also check the information supplied when the policy was taken out. Medical, financial and other questions should therefore be answered fully and accurately when you apply for cover.

Read our guide to the relevant life insurance underwriting process for more information about what insurers may ask when you apply.

How long does a relevant life claim take?

There isn’t a standard period that applies to every claim.

The insurer needs sufficient information to establish that the claim is valid before it can release the funds.

A straightforward claim where all the necessary documents are readily available may be dealt with more quickly than one where the insurer needs further medical information or has to investigate details of the policy.

The trustees can help avoid unnecessary delays by contacting the insurer promptly and providing the documents it requests.

Keeping the trust paperwork accessible is also important, as the insurer may need to review the trust deed and any subsequent documents related to it before the proceeds can be released.

Make sure your trust details are kept up to date

A relevant life policy may remain in force for many years, and your family circumstances can change during that time.

You might marry, divorce, have children or simply decide that you would like different people to benefit from the policy.

It’s therefore worth checking your nomination or expression of wishes from time to time and making sure your trustees know that the policy exists and where the relevant documents are kept.

If you change employers or leave your company, there may also be options to transfer or change the policy. Read our guide to what happens to relevant life insurance if you change companies.

What happens after a successful claim?

In a straightforward death claim, the process broadly works as follows:

1. The trustees contact the insurer and register the claim.
2. The insurer confirms which documents and information it needs.
3. The trustees provide the required evidence.
4. The insurer assesses the claim.
5. Once accepted, the insurer pays the lump sum to the trustees.
6. The trustees distribute or manage the money in accordance with the trust.

The important point is that the payout isn’t normally made to the limited company or directly into the deceased director’s estate.

The trustees receive the payout and then pass the money to the beneficiaries in line with the terms of the trust.

Get a relevant life insurance quote

If you’re considering relevant life insurance for you or another director or employee, you can speak to a specialist about the available cover and how a policy would be set up through your limited company.

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