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

Relevant life insurance is an 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 is its tax efficiency. Unlike a personally purchased 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, and are not treated as a benefit-in-kind for the employee, avoiding income tax and National Insurance. For a higher or additional-rate taxpaying director, this can make relevant life insurance significantly more cost-effective than a personal policy providing the same cover.

At J Finance, we advise employers and company directors on relevant life insurance as part of our broader business protection service, explaining the tax benefits clearly and ensuring the policy and trust are structured correctly.

Who Is Relevant Life Insurance For?

Directors of Small Companies

Group schemes typically require a minimum number of employees to be eligible, which many small companies don't reach. A relevant life policy fills this gap for individual directors or key employees.

High Earners Near the Pension Lifetime Allowance

Death-in-service benefits through a registered group scheme count towards the pension lifetime allowance. Relevant life policies don't, making them an important planning tool for high earners.

Employers of Any Size

Provides 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 don't receive a salary. Cover requires a genuine employer-employee relationship.

The Tax Advantages Explained

Employer premiums: generally an allowable business expense, reducing the company's taxable profits and corporation tax.

No benefit-in-kind: the employee doesn't pay income tax on the value of the premiums, and neither party pays National Insurance on them.

Payout to trust, not estate: the payout goes to a discretionary trust, so it doesn't form part of the estate for probate or inheritance tax purposes, and can be distributed to beneficiaries quickly.

No pension lifetime allowance impact: the policy isn't a registered pension scheme, so the sum assured doesn't count towards the pension lifetime allowance.

How Much Cover Can Be Arranged?

The sum assured is typically based on a multiple of total remuneration, including salary, bonuses, and dividends, with multiples of up to 25 times available from some insurers depending on age and cover level. Most policies also include terminal illness benefit, and some offer optional features such as an accidental death benefit during underwriting, a continuation option to take the policy personally when leaving the business, and a life events increase option allowing the sum assured to rise following marriage, divorce, or a new child without further underwriting.

The Discretionary Trust Requirement

All relevant life policies must be written in trust, a requirement rather than an option, since HMRC requires this for the tax treatment to apply. The trust is typically discretionary, with trustees having discretion over which named beneficiaries receive the payout and in what proportions, based on the employee's nomination, which can be updated over time. Because the payout goes to the trust rather than the estate, it avoids inheritance tax and probate, reaching beneficiaries more quickly.

What Happens When an Employee Leaves the Business?

The employer's interest in the policy generally ends, and it cannot simply be transferred to a new employer. However, many policies include a continuation option, allowing the departing employee to take out a new personal policy of equivalent value without further medical underwriting, valuable for anyone who has developed health conditions since the original policy began. Availability and terms vary between insurers and should be checked before the policy is arranged.

Relevant Life Insurance vs Group Life Insurance

Both provide employer-funded death-in-service benefits, but they suit different situations.

Group Life Insurance

Covers multiple employees under a single policy, typically more cost-effective for larger businesses with enough staff to qualify. Registered schemes have similar tax advantages, but the sum assured does count towards the pension lifetime allowance.

Relevant Life Insurance

Covers one individual per policy, appropriate for businesses without a group scheme, directors of small companies, or high earners concerned about the pension allowance interaction. More administratively flexible, with no minimum numbers required.

For businesses with a mix of employees, it's sometimes appropriate to use a group scheme for the general workforce and relevant life policies for directors or high earners needing pension allowance protection.

Tips Before Arranging Relevant Life Insurance

  • Confirm the employment relationship is in place. Directors must receive a salary, not purely dividend income, to qualify.
  • Ensure the trust is established correctly from the outset, since the policy must be written in trust immediately.
  • Take accountancy advice on the tax position, particularly where a director's remuneration structure is complex.
  • Keep beneficiary nominations up to date, especially following marriage, divorce, or the birth of children.
  • Review the sum assured regularly as remuneration increases, to keep cover proportionate to earnings.
  • Check whether a continuation option is available if the employee may change employment in future.

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 providing cover for a single director or a number of key employees outside a group scheme, we will take the time to understand your business structure. 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.