Relevant Life Insurance - The Tax-Efficient Life Cover For Directors

Take advantage of the small business insurance that provides a death-in-service benefit for company directors or employees

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Graham Cox
CeMAP Mortgage & CPSP Specialist Finance Advisor

As a small business policy, relevant life insurance can be extremely beneficial for limited company directors and employees alike.

In this jargon-free guide, you'll learn what relevant life cover is,  how it works, what the key benefits and features are, and much more.

What is relevant life insurance?

Relevant life insurance is tax-efficient small business insurance that provides a death-in-service benefit for an individual company director or other employee.

Upon the insured person's death or diagnosis of terminal illness, relevant life cover pays a tax-free lump sum benefit to their family or other designated beneficiaries.

Life insurance for directors, paid for by your business.

Unlike a personal life insurance policy, relevant life cover is paid for by a business, and provides significant tax advantages for both employer and employee.

It's a single-life policy, so needs to be taken out for each employee individually.

Relevant life is therefore suitable for small businesses with less than five employees. Larger employers tend to take out Group Life Insurance instead.

Crucially, relevant life cover can be a powerful recruitment tool not just for new employees but as an aid to employee retention as well.

How does relevant life insurance work?

  • The employer is the policyholder, selects the desired benefit level, and pays the monthly premium.
  • The benefit level is usually set at a multiple of current income. For company directors, income is based on salary, dividends and P11D benefits-in-kind as declared in their latest tax calculation.
  • The employee or director (the life covered) must receive their salary through PAYE payroll.
  • The RLC policy is written into a trust and the employee or limited company director specifies who they'd like as their trustees and beneficiaries.
  • In the event of the employee passing away during their employment, the trustees make a claim and the insurer pays the tax-free lump sum.
  • The trustees distribute the benefit amount to the beneficiaries tax-free in accordance with the employee's wishes when setting up the trust.
  • The policy cover is only payable if the individual is employed by the business at the point of passing away or terminal illness diagnosis with less than one year to live. And no later than their 75th birthday.
  • The benefit is only paid once, after which the policy is terminated.
  • The policy has no cash-in or surrender value.

What happens to the policy if an employee leaves the business?

If an employee leaves their employment, either to work elsewhere or retire, they are no longer covered.

The policy is then suspended. However, it can be transferred to the employee's new employer, and as long as the premiums are paid, the relevant life status will be maintained.

Alternatively, the employee can take out their own life insurance policy with the same insurer. The policy won't have relevant life status, and the premium will be determined at the point of taking it out.

Terminal illness benefit is nearly always included as standard

Nearly all relevant life policies include terminal illness benefit.

This means that if a medical professional provides the employee or company director with a terminal illness diagnosis and less than 12 months to live, the policy will pay out the full lump sum.

How does a designated trust work?

To prevent tax or insurance fraud, the use of a designated trust is a mandatory requirement for a relevant life policy.

A discretionary trust is a legal arrangement whereby nominated trustees are engaged to administer the policy before and during any claim.

The benefit funds are received and held by the trust before being distributed to the employee's beneficiaries.

The good news is a trust is free, quick and easy to set up during the application process. Your protection adviser will undertake the trust creation on your behalf.

Using a discretionary trust has a few key benefits.

  1. The lump sum falls outside the deceased's estate for Inheritance Tax purposes so no tax is due.
  2. As there is no need to wait for a Grant of Probate to be issued, the beneficiaries can receive the benefit quickly.
  3. If necessary, the benefit can also be used to pay any Inheritance Tax due on the employee's estate.  Allowing beneficiaries to obtain early release of property and other assets.

There are three parties involved in the creation of a trust:

  • The Settlor. The employer who places the policy into trust
  • The Trustees. Usually family members and/or other trusted individuals chosen by the employee.
  • The beneficiaries. The people who receive the benefit of the policy payout proceeds, usually family members.

As a discretionary trust, the trustees have some flexibility about the release of funds. For example, if the beneficiary is a child.

But the key point is they are legally obligated to act in the best interests of the beneficiaries.

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Who is eligible for relevant life cover?

To be eligible for relevant life cover, there must be an employer/employee relationship. Only employees registered for payroll with the HMRC can be insured.

There's two elements to the qualifying criteria, one for the type of business employer, and one for the individual being covered.

What type of business can take out a relevant life policy?

Only business structures which are legal entities can take out a policy in the name of the business:

  • Limited companies
  • Limited liability partnerships (LLP)

For other partnerships, all the partners would need to take out the policy on the life of the employee. Similarly, the owner of a sole trader business would apply in her personal name on behalf of the employee.

Who is eligible to be an insured person?

The life insured must be all of the following:

  • A permanent UK resident
  • Living in the UK
  • Employed by a UK based business

and one of the following:

  • Limited company director
  • A non-director employee of a Ltd company
  • An employee of a LLP such as a salaried LLP member
  • An employee of a partnership or sole trader

Limited company directors qualify if they receive their salary through PAYE . This includes directors who are the sole employee and wish to take out death-in-service benefit to protect their family.

Who is ineligible to be insured?

As no employer/employee relationship exists, the following individuals do not qualify for cover on themselves:

  • LLP equity members
  • Equity partners in a partnership
  • Sole traders

What are the key features of relevant life cover?

It's possible to tailor your relevant life policy with different features and options. You can even remove some standard features if you don't need them, reducing your premium in the process.

Level or increasing term assurance.

With level term cover, the employer chooses a fixed lump sum benefit amount or a multiple of employee earnings.

The premium is usually guaranteed for the duration of the policy term so won't increase unless the policy is amended.

Increasing term assurance protects the purchasing power of the lump sum payout by index-linking the benefit to account for inflation.

The level of indexation is up to the employer and chosen at the outset. Typical options are 3%, 5% and the Retail Price Index (RPI). Premiums increase each year, broadly in line with the indexation level.

Total and permanent disability cover

For a small premium increase, the option to add total and permanent disabiliy cover to the insurance policy is well-worth considering.

With this option, the insurer pays the full tax-free lump sum benefit if the employee suffers an accident, injury or illness that leaves them totally and permanently disabled.

Free cover during application process

To avoid the tragic situation where the applicant dies whilst waiting for their policy to be approved and placed 'on risk' (ie live), many life insurance companies provide some form of free cover during the application process.

For example, if due to a pre-existing medical condition the insurer needs to check the applicant's medical records, it can take a few weeks to access them from the GP or other healthcare provider.

The insurance cover provided during the wait for final approval may be on reduced terms, but provides some peace of mind nonetheless.

Terminal illness benefit

Most relevant life policies include this benefit as standard. It pays the full tax-free benefit if the insured person is diagnosed with less than 12 months to live.

Serious illness cover

For further details please see the section below called Can I get critical illness cover with relevant life insurance?

Guaranteed or reviewable premiums

A guaranteed premium is fixed for the policy term. So it's the best bet if you want to know exactly how much the policy will cost.

Reviewable premiums often start out cheaper, but are usually reviewed after the first five years, and every year or five years thereafter.

Upon review, the premium may increase or decrease, depending on a range of factors including the insurer's claims experience, advances in medicine and so on.

Reviewable premiums often end up being more expensive than guaranteed premiums over the policy term.

Speak to an SEMH protection adviser if you'd like to discusss the above options or get a bespoke quote.

What are the key benefits of relevant life cover?

A relevant life policy provides significant tax benefits to both the employer and employee.

For the employer, the insurance premiums are an allowable business expense and therefore reduce the business' corporation tax liability.

For employees the payout, unlike with a group scheme, is not included in the lifetime pension allowance (£1.073m in 2023/24). This can be particularly advantageous for high-earners.

Is relevant life cover a P11D benefit?

No. Relevant life is not classed as an employee P11D benefit-in-kind. So there's no additional income tax to pay.

What is the difference between life insurance and relevant life insurance?

The key difference is that the relevant life policy premiums are paid by the business from gross profit and therefore more tax-efficient. And as the employee pays no extra tax for the benefit, it's a win-win.

Can I get critical illness cover with a relevant life policy?

Due to legislative changes in 2016, very few insurance providers sell critical illness cover as an add-on to relevant life insurance nowadays.

As previously mentioned, terminal illness benefit is usually included with RLC. However, one or two insurers offer additional protection in the form of serious illness cover. Some insurers call this significant illness cover.

Unlike critical illness cover, serious illness cover pays out only if the employee becomes seriously unwell and is forced to retire permanently or the illness is expected to lead to their retirement.

It doesn't pay out if the employee returns to work or their employment is terminated for another reason.

The range of serious illnesses covered depends on the insurance company's policy definition, but often include:

  • Heart attack or a severe heart condition/disease
  • Stroke
  • Cancer (excluding minor/or early stage cancers that are easily treated)
  • Multiple sclerosis
  • Motor neurone disease
  • Parkinson's disease
  • Dementia
  • Alzheimers disease
  • Major organ transplant
  • Brain tumour
  • Organ failure such as kidney or liver failure
  • Respiratory failure

To qualify, the illnesses and injuries must meet the insurer's specified level of severity and/or result in permanent symptoms. The definitions are specified in the insurers policy conditions document which will be provided in advance by your adviser.

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How much does relevant life insurance cost?

The cost of taking out a relevant life policy for an employee can vary enormously depending on their:

  • age
  • occupation
  • weight
  • current health
  • pre-existing conditions
  • family medical history (parents and siblings)

Other factors include:

  • whether the premiums are guaranteed or reviewable
  • the length of the policy term
  • the multiple of salary to be insured.

Getting a quote

If you'd like a relevant life insurance quote, please schedule a call with a protection adviser at a time to suit you. Your adviser can also advise on complementary policies such as shareholder protection insurance plans, business loan insurance and executive income protection insurance

We have access to both household name and niche insurers, offering the broadest range of policy coverage and premiums.

You can also call on 0117 205 0655 Monday to Friday between 9am and 5pm.

Graham Cox - MLIBF CeMAP Mortgage Adviser & Director of Hub FS Ltd

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited.

Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK get great mortgage and protection deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, FT Adviser, and BBC Radio Bristol.