Relevant life insurance, explained

If you run a limited company, you can often provide life cover for yourself or an employee through the business, in a tax-efficient way. That's relevant life insurance. Let me walk you through it, jargon-free.

What relevant life insurance actually is

Relevant life insurance is a life insurance policy taken out and paid for by a business on the life of an individual employee — including a company director who's treated as an employee. If that person dies while covered (and usually if they're diagnosed with a terminal illness), it pays out a lump sum to their family.

Think of it as a death-in-service benefit — the kind of cover big employers offer their staff — but written for one person at a time, rather than as a large group scheme. That's why it's a popular option for small companies that don't have a group scheme, and for directors who'd rather have cover paid for through the business than out of their own pocket.

How it works — and the trust bit

The business owns the policy, pays the premiums, and the person covered is the life assured. But the payout doesn't go to the business. It's written into a discretionary trust from the start, so the money goes to the employee's chosen family or dependants.

A trust is simply a legal arrangement that holds the payout and passes it to the right people. Setting it up properly matters — it's what keeps the money out of the company's hands and, generally, outside the employee's estate for inheritance tax. Most insurers provide the trust paperwork alongside the policy.

Cover is commonly set as a multiple of salary, and policies typically run to a chosen age rather than for life. The exact limits and terms vary from insurer to insurer.

Who it's for — and who it isn't

Relevant life cover is generally aimed at:

• Company directors who want life cover paid for by their company rather than from their own taxed income.
• Small businesses that are too small for a group death-in-service scheme but still want to look after key people.
• Higher earners whose pension savings are already sizeable, because the payout doesn't normally use up pension allowances.

It's usually not available to the self-employed, sole traders or equity partners, because they aren't employees of a company. If that's you, personal life insurance is the more common route. A qualified adviser can confirm what fits your particular set-up.

Why businesses like it — the tax side

The appeal is mostly about tax efficiency, though the exact treatment depends on your circumstances and the rules can change over time:

• Premiums are usually treated as an allowable business expense, so they can often be offset against corporation tax (subject to your accountant's view and the "wholly and exclusively" rule).
• Unlike some perks, the premiums generally aren't treated as a taxable benefit in kind on the employee — meaning they usually don't attract income tax or National Insurance for the person covered.
• The payout normally reaches the family free of income tax and, because it sits in trust, usually outside the estate for inheritance tax.

Because tax depends so heavily on your own situation, this is exactly the sort of thing to confirm with your accountant and a protection adviser before you rely on it.

Relevant life vs the alternatives

It helps to see where relevant life sits alongside the two things people most often compare it with:

• Personal life insurance — you own it and pay from your own already-taxed income, and it isn't tied to your employer. Portable and simple, but no business tax efficiency.
• Group death-in-service — one scheme covering many employees at once, which suits larger teams, but usually needs a minimum number of members and isn't built around a single director.
• Relevant life — sits in between: business-paid and tax-efficient like a group scheme, but written for one person like a personal policy.

None of these is automatically "better" — it depends on your company size, your tax position and what you're trying to protect. That's a genuine advice question, not a one-size-fits-all answer.

Things worth checking

• Who's covered and for how much — the amount is often linked to salary, and the limits and age caps vary between insurers.
• The trust — make sure it's set up correctly and your nominated beneficiaries are kept up to date.
• What happens if you move on — some policies can be continued or transferred if you leave the business; it's worth knowing before you need it.
• Health and honesty — like all life cover, it's medically underwritten, so answering the health questions fully and accurately is what protects the payout.

This guide is general information, not advice. This guide is general information, not advice.