Relevant Life Insurance: Tax-Efficient Life Cover Paid for by Your Business

What Is Relevant Life Insurance?

Relevant life insurance is a individual life insurance policy that is taken out and paid for by an employer on behalf of an employee or company director. The employer pays the premiums, and if the insured person dies during the policy term, a lump sum is paid out to a discretionary trust for the benefit of the employee's chosen dependants or beneficiaries.

The key appeal of relevant life insurance is its tax efficiency. Unlike a personally purchased life insurance policy, where premiums are paid from post-tax income, relevant life insurance premiums are paid by the business and are generally treated as an allowable business expense for corporation tax purposes. The premiums are also not treated as a benefit-in-kind for the employee, which means they do not attract income tax or National Insurance contributions. For a higher-rate or additional-rate taxpaying director, this difference in tax treatment can make relevant life insurance significantly more cost-effective than a personal policy providing the same level of cover.

At J Finance, we advise employers and company directors on relevant life insurance as part of our broader business protection service. We explain the tax benefits clearly, help establish the right level of cover, and ensure the policy and trust are structured correctly from the outset.

Who Is Relevant Life Insurance For?

Relevant life insurance is available to limited companies and their employees, including company directors who receive a salary from the business. It is particularly useful in the following situations.

Directors of small limited companies who want life cover but whose business does not have a group life insurance scheme in place. Group schemes typically require a minimum number of employees to be eligible, which means many small companies cannot access them. A relevant life policy fills this gap for individual directors or key employees.

High earners who are approaching or have exceeded the pension lifetime allowance. Death-in-service benefits provided through a pension or registered group life scheme count towards the pension lifetime allowance, which can create a tax charge where the total exceeds the limit. Relevant life policies are not registered pension schemes and do not count towards the pension lifetime allowance, making them an important planning tool for high earners who want to maintain substantial life cover without pension allowance implications.

Employers of any size who want to provide meaningful death-in-service protection to individual employees in a tax-efficient way, without the administrative complexity of a full group scheme.

Relevant life insurance is not available to sole traders, equity partners in traditional partnerships, or shareholders who do not receive a salary from the business. Cover is only available where there is an employer-employee relationship in place.

The Tax Advantages Explained

The tax efficiency of relevant life insurance operates on several levels, and understanding each of them clearly is important to appreciating the full value of this product.

Premiums paid by the employer are generally treated as an allowable business expense, meaning they reduce the company's taxable profits and therefore reduce corporation tax. At current corporation tax rates, this means a portion of the premium cost is effectively subsidised by the tax saving.

The premiums are not treated as a benefit-in-kind for the employee. This means the employee does not pay income tax on the value of the premiums, and neither the employee nor the employer pays National Insurance contributions on them. For a higher-rate taxpayer, this is a significant difference compared to a personal policy where the equivalent premium would need to be earned and taxed before being available to pay for the cover.

The payout on death is made to a discretionary trust rather than to the employee's estate. This means it does not form part of the estate for probate or inheritance tax purposes and is not subject to inheritance tax. The payout can be distributed to the beneficiaries quickly, without waiting for probate to be granted, which is an important practical benefit for a bereaved family.

The policy does not count as a registered pension scheme, which means the sum assured does not count towards the pension lifetime allowance. This is relevant for directors and high earners who want to maintain high levels of life cover without their death-in-service benefit being caught by pension allowance restrictions.

How Much Cover Can Be Arranged?

The sum assured under a relevant life policy is typically based on a multiple of the employee's total remuneration, which includes salary, bonuses, dividends received from the company, and other regular remuneration. Multiples of up to 25 times total remuneration are available from some insurers, though the specific multiple accepted varies between providers and depends on the individual's age and the level of cover requested.

The policy provides a lump sum on death during the term. Most policies also include terminal illness benefit, which pays the sum assured if the insured is diagnosed with a terminal illness and is not expected to live for more than twelve months. Some policies offer optional additional features such as an accidental death benefit during the underwriting period, a continuation option allowing the employee to take over the policy personally when they leave the business without requiring further medical underwriting, and a life events increase option allowing the sum assured to be increased following major life events such as marriage, divorce, or the birth of a child without additional underwriting.

The Discretionary Trust Requirement

All relevant life policies must be written in trust. This is not optional. HMRC requires the policy to be placed in trust for it to qualify for the tax treatment that makes relevant life insurance advantageous.

The trust is typically a discretionary trust, meaning the trustees have discretion over who among the named beneficiaries receives the payout and in what proportions. The employee nominates their chosen beneficiaries when the policy is set up and can update the nomination over time as their circumstances change.

Because the payout goes to the trust rather than to the employee's estate, it is not subject to inheritance tax and does not go through probate. Beneficiaries can receive the money relatively quickly after the death is confirmed and the claim is paid, without having to wait for the legal administration of the estate to be completed.

We ensure that the trust is set up correctly at the outset and that the employee understands how the nomination process works and how to keep their wishes up to date over time.

What Happens When an Employee Leaves the Business?

If the employee covered by a relevant life policy leaves the business, the employer's interest in the policy generally ends. The policy cannot simply be transferred to a new employer or continued by the individual on the same terms.

However, many relevant life policies include a continuation option, which allows the departing employee to take out a new personal life insurance policy of equivalent value without having to undergo further medical underwriting. This can be a valuable protection for employees who have developed health conditions since the original policy was taken out and who might otherwise struggle to obtain new cover at standard terms. The availability and terms of continuation options vary between insurers and should be checked before the policy is arranged.

Relevant Life Insurance vs Group Life Insurance

Both relevant life insurance and group life insurance provide death-in-service benefits funded by the employer, but they operate differently and suit different business situations.

Group life insurance covers multiple employees under a single policy and is typically the more cost-effective approach for larger businesses with enough staff to qualify for a scheme. HMRC registered group life schemes benefit from similar tax advantages to relevant life insurance in terms of employer deductibility, but the sum assured does count towards the pension lifetime allowance, which can be a disadvantage for high earners.

Relevant life insurance covers one individual per policy and is the appropriate solution for businesses that do not have a group scheme, for directors of small companies, or for high earners for whom the pension lifetime allowance interaction is a concern. It is more administratively flexible than a group scheme and can be arranged for a single individual without minimum numbers.

For businesses with a mix of employees, it is sometimes appropriate to use a group scheme for the general workforce and relevant life policies for directors or high earners who need the pension allowance protection. We advise on the most appropriate combination for your business structure and workforce.

Tips Before Arranging Relevant Life Insurance

Confirm the employment relationship is in place. Relevant life insurance requires a genuine employer-employee relationship. Sole traders and equity partners are not eligible. Directors must be in receipt of a salary from the company, not purely dividend income, to qualify.

Ensure the trust is established correctly from the outset. The policy must be written in trust immediately. Placing a personally held policy into trust retrospectively does not achieve the same tax treatment and may not be possible at all.

Take accountancy advice on the tax position. The tax treatment of relevant life insurance premiums and payouts is well established, but it is worth confirming the specific position with your accountant before arranging the policy, particularly where the director's remuneration structure is complex.

Keep beneficiary nominations up to date. The discretionary trust nomination is not legally binding on the trustees, but it guides them in exercising their discretion. Keeping it current as personal circumstances change, particularly following marriage, divorce, or the birth of children, ensures the employee's wishes are clearly recorded.

Review the sum assured regularly. As remuneration increases over time, the cover amount should be reviewed to ensure it remains proportionate to total earnings and the employee's protection needs.

Check whether a continuation option is available if the employee may change employment. For key individuals where maintaining life cover on any future change of employment is important, selecting a policy with a continuation option is worth prioritising.

Get Started with J Finance

We work with employers, company directors, and small business owners across the UK to arrange relevant life insurance as part of a broader tax-efficient protection strategy. Whether you are looking to provide cover for a single director or for a number of key employees outside a group scheme, we will take the time to understand your business structure and recommend the most appropriate arrangement.

Appointments are available by phone, video, or face-to-face at our Newbury office, with out-of-hours slots available on request.

To arrange a no-obligation conversation, call us on 01635 521300 or email contact@jfinance.co.uk.