Risk warning: A relevant life policy is a form of life insurance and typically has no cash-in value at any time; cover will cease at the end of the policy term. If premiums are not maintained, the policy will lapse and cover will be lost. Tax treatment depends on individual circumstances and may change in the future. This article is for information only and does not constitute financial advice.
A relevant life policy is one of the most tax-efficient ways for a limited company director to arrange personal life cover, yet many directors default to a personal policy simply because that’s what they’re used to buying. Understanding how the two compare matters before you decide.
Why Directors Use a Relevant Life Policy Instead of Personal Cover
When your company pays for a relevant life policy, the premiums are usually treated as an allowable business expense, so the company can claim corporation tax relief on them, and, unlike a bonus or salary used to fund personal cover, the premiums generally are not treated as a P11D benefit in kind or liable for income tax and National Insurance in the way a personal policy funded from taxed income would be. That combination is why it’s often the more efficient route for a single director or small director-led company to provide their own life cover.
Who Counts as a Director for This Purpose
You need to be an employee or director of a UK limited company for the company to take out a policy on your life, the policy is owned and paid for by the company, not by you personally. Sole traders and equity partners in a partnership fall outside this structure, since there’s no separate employer entity to hold the policy.
Setting One Up as a Director
The company applies for the policy, nominates you as the person covered, and sets up a discretionary trust so that any payout goes directly to your chosen beneficiaries rather than into the company’s assets on your death. This trust step is what keeps the payout outside your estate for inheritance tax purposes and ensures the money reaches your family quickly rather than being tied up in company or personal probate.
What It Means for Your Company’s Accounts
Premiums sit on the company’s books as a business expense. Cover levels and premiums vary by insurer, age, health, and the amount of cover chosen, so there’s no fixed cost you can assume in advance, a broker or adviser can give you a quote specific to your circumstances.
How It Compares to Other Director Benefits
Directors often already have a pension and possibly income protection arranged through the company, and it’s worth thinking about a relevant life policy alongside those rather than in isolation. Unlike a pension, the relevant life payout goes to your family immediately on death rather than being drawn down over time, and unlike income protection, it pays a lump sum rather than replacing income while you’re unable to work. The three products address different risks, and many directors end up with some combination of all three rather than treating relevant life cover as a replacement for the others.
Getting Advice
Relevant life policies are a form of regulated financial advice territory, the right structure depends on your company’s setup, your existing protection, and your personal circumstances, so it’s worth speaking to a qualified financial adviser before applying.
A Note on Underwriting
As with any life insurance product, you’ll go through medical underwriting when you apply, insurers will ask about your health history and may request a medical report depending on the level of cover requested. This is the same underwriting process you’d face with personal life insurance; the difference is purely in how the policy is owned and paid for, not in how your risk is assessed.
Related guides
- What Happens to a Relevant Life Policy When the Company Is Wound Up?
- Who Can Take Out a Relevant Life Policy?
- Tax Benefits of a Relevant Life Policy
- What Is a Relevant Life Policy? A Plain English Guide
- How to Set Up a Relevant Life Policy: Step by Step
- Speak to an Adviser
- Relevant Life Policy: A Guide for Accountants Advising Directors
Is a Relevant Life Policy a Benefit in Kind?
In most cases, no. Where a relevant life policy is set up correctly, company-owned, written into a discretionary trust, and meeting the HMRC conditions for a relevant life plan, the premiums are not normally treated as a P11D benefit in kind on the director, and there is normally no income tax or National Insurance charge on the individual as a result of the company paying them. That is the main structural difference from a company simply paying for an ordinary personal life insurance policy on a director’s behalf, which would usually be a taxable benefit. The treatment depends on the policy meeting the qualifying conditions and on your own circumstances, so confirm it with your accountant before you rely on it.
Is Life Insurance Tax Deductible Through a Limited Company?
Premiums on a properly constituted relevant life policy are usually treated as an allowable business expense and deducted for corporation tax purposes, provided the expenditure is wholly and exclusively for the purposes of the trade, broadly, that the cover is part of the remuneration package for a genuine employee or director rather than a shareholder benefit. HMRC can challenge deductibility where the level of cover looks disproportionate to the individual’s role or where the arrangement mainly benefits a shareholder rather than an employee. An ordinary personal life policy paid for by the company does not receive the same treatment.
What Happens at Claim Stage
On death or, where the plan includes it, on diagnosis of a terminal illness within the policy definition, the claim is made to the insurer and the proceeds are paid to the trustees of the discretionary trust rather than to the company. The trustees then distribute to the beneficiaries in line with the trust deed and the letter of wishes. Because the policy sits in trust, the payout is not normally a company asset and does not usually form part of the director’s estate for inheritance tax. Keeping the trust documentation, trustee details and letter of wishes up to date, particularly after a change in personal circumstances, is what keeps that route working at claim stage.
Where Directors Most Often Go Wrong
The three recurring issues are: not putting the policy in trust at outset, so the payout risks falling to the company; naming the wrong policy owner on the application; and letting the trust paperwork drift out of date after a marriage, divorce or new child. None of these are difficult to avoid, but all of them are far easier to fix at setup than at claim.
Related Guides
To explore policy structures and provider criteria across the UK market, see our detailed guide to compare relevant life insurance for directors.