What is relevant life insurance?
Relevant life insurance is a type of life cover that a limited company can provide for a director or employee. The company pays the premiums, and if the insured person dies while the policy is in force, a tax-free lump sum is paid to their beneficiaries through a discretionary trust.
This structure offers similar personal protection to a standard life insurance policy, but with significant tax advantages for both the company and the individual.
Who it’s for
Relevant life insurance is available to directors and employees of UK-registered limited companies. It’s ideal for owner-managed businesses where the director wants personal life cover but doesn’t qualify for a group scheme. Sole traders and traditional partnerships are not eligible, as the policy must be arranged and funded by a company.
Why directors use it
- Paid by your company: premiums are usually treated as a business expense rather than being paid personally.
- Tax-efficient: qualifying policies are typically not a benefit-in-kind, and premiums may be deductible for corporation tax.
- No impact on pensions: relevant life premiums don’t count towards your annual pension allowance or lifetime limit.
- Tax-free payout: proceeds are normally paid free of income tax and inheritance tax if the trust remains in place.
How it works
- The company takes out a life insurance policy on the life of a named director or employee.
- The policy is written into a discretionary trust at the outset to ensure the benefit is paid to the chosen beneficiaries.
- The company pays the premiums directly to the insurer. These may qualify as a deductible business expense if the policy is provided wholly and exclusively for business purposes.
- If the insured person dies during the policy term, the insurer pays the lump sum to the trustees, who then distribute it to the beneficiaries.
Trusts and beneficiaries
Writing the policy under a discretionary trust ensures that the payout falls outside the deceased’s estate for inheritance tax purposes and that the money reaches beneficiaries quickly. Our partner Broadbench provides the trust documentation as part of the application process and can guide you through the setup.
Setting up a policy
- Decide the level of cover and policy term, considering income, family needs, and any business loans.
- Apply through an adviser such as Broadbench, who will handle quotes and medical underwriting.
- Sign the trust documentation to confirm who should receive the benefit.
- Premiums are paid from the company bank account for the duration of the policy.
When it’s most effective
Relevant life insurance is most commonly used by directors of small or single-director limited companies who want life cover in a tax-efficient way. It can also be used by larger firms to protect key employees without needing a group life scheme. Insurers typically allow cover of up to 25 times remuneration, depending on age and underwriting.
Key points to remember
- Provides life cover only – critical illness can be added separately.
- Premiums are paid by the company, not the individual.
- Payouts are normally tax-free if the policy remains within trust.
- Tax treatment depends on current HMRC rules and your company’s circumstances.
For more detail, see our guides on setting up relevant life cover, the tax benefits, and how it compares with personal life insurance.