A relevant life policy is a form of life insurance designed specifically for limited company directors and business owners. If you run a company and want to protect your business and family against the financial impact of your death, this is something worth understanding. Here are the key facts you need to know.
What Is a Relevant Life Policy?
A relevant life policy is a life insurance arrangement where your company pays the premiums, but the policy is written into a discretionary trust from the outset. The death benefit is paid to the trust, not to the company, and the trustees then pay it on to your chosen beneficiaries, usually your family. Keeping the payout outside the company is what allows it to bypass corporation tax on receipt and stay outside your estate for inheritance tax purposes.
The policy is called “relevant” because it meets specific HMRC conditions. This matters because it affects how the premiums and benefits are taxed.
Maximum Cover Available
There is no set maximum amount you can insure for under a relevant life policy. The limit depends on:
- Your age and health
- Your insurer’s underwriting guidelines
- What you can justify as a business need
In practice, most policies range from £100,000 to £2 million, though larger amounts are possible. Your insurer will ask questions about your income, business assets, and why you need the cover. They want to ensure the amount is reasonable for your circumstances.
Who Can Take Out a Relevant Life Policy?
You must be a director or employee of a limited company to be eligible. The company takes out and pays for the policy, but it is written into a discretionary trust from the outset, so while the company arranges and funds the cover, it does not own the payout or receive the benefit.
You can take out a relevant life policy even if you already have personal life insurance. Some business owners do both, keeping personal cover for their family’s immediate needs and a relevant life policy to protect the business.
How Are Premiums Paid?
Your company pays the premiums directly to the insurance provider. This is usually done monthly or annually, depending on your agreement with the insurer.
From a tax perspective, the premiums are treated as a business expense, which means they reduce your company’s taxable profit. This is one of the key advantages of a relevant life policy compared to personal life insurance, where premiums are paid from your personal, post-tax income.
The premiums themselves are not taxed as a benefit in kind to you as a director. This is because HMRC recognises them as a legitimate business cost.
What Affects Your Premiums?
Several factors influence how much you’ll pay:
- Your age: Younger people typically pay less
- Your health: Any existing medical conditions or lifestyle factors (like smoking) will increase premiums
- The cover amount: Higher sums insured cost more
- The policy term: Shorter terms are usually cheaper than longer ones
- Your occupation: Some jobs carry higher risk
It’s common for insurers to ask for medical evidence before offering a quote. They may request information from your GP or arrange a medical examination, depending on your age and the cover amount you’re seeking.
What Happens When You Make a Claim?
If you die while the policy is in force, the trustees of the discretionary trust notify the insurer. They’ll need to provide the death certificate and complete a claim form on behalf of the trust.
The insurer will assess the claim and, if valid, pay the lump sum to the trust rather than to the company. This usually takes between two and four weeks, though it can vary depending on the circumstances and the insurer’s processes.
Once the trust receives the payout, the trustees distribute it to the beneficiaries named in the trust, normally your spouse, partner or children. The company is not involved in this step, which is what keeps the payout outside the business and outside your estate.
What Happens If You Leave the Company?
If you resign as a director or leave employment, the policy typically ends. The company can no longer claim the premiums as a business expense after you leave.
Some policies offer the option to convert to personal cover, though this usually happens at standard rates and you’ll need to apply before your employment ends. Check your policy documents or ask your insurer about this.
Is There a Medical Underwriting Process?
Yes. Before the policy starts, the insurer will assess your health. This might involve:
- A detailed health questionnaire
- Medical records from your GP
- A medical examination (for larger cover amounts or if you’re older)
- Blood or urine tests in some cases
Be honest in your responses. If you misrepresent your health, the insurer can refuse to pay a claim or cancel the policy.
How Long Does Cover Last?
This depends on the type of policy you choose. Term life policies run for a fixed period, such as 10, 20, or 30 years. Whole of life policies continue until you die (provided premiums are paid). Some policies also include critical illness cover, which pays out if you’re diagnosed with a serious illness before death.
What Happens to the Policy If Your Company Is Sold?
If you sell your business, the new owners may not want to continue your relevant life policy. You have a few options:
- Convert it to personal cover (if the policy allows)
- Surrender the policy and receive any cash value
- Let it lapse
The timing of a business sale and when your policy ends can have tax implications, so it’s worth discussing this with your accountant and insurer before you sell.
Getting Professional Advice
A relevant life policy can be a powerful tool for business protection, but it needs to fit your specific circumstances. The right cover amount, the right type of policy, and the right beneficiary arrangements all matter.
This article is for information only and does not constitute financial advice. For advice tailored to your circumstances, speak to a qualified financial adviser.
Related guides
- What Is a Relevant Life Policy? A Plain English Guide
- Who Qualifies for a Relevant Life Policy?
- Tax Benefits of a Relevant Life Policy
- Relevant Life Policy for Limited Company Directors
- Relevant Life Policy: A Guide for Accountants
- What Happens to a Relevant Life Policy When the Company Is Wound Up?
- Is a Relevant Life Policy the Same as Relevant Life Assurance?
Is a relevant life policy taxed as a benefit in kind?
Normally no. Where the plan meets the HMRC relevant life conditions and is held in a discretionary trust, the premiums are not usually reported as a P11D benefit and there is normally no income tax or National Insurance charge on the individual. A personal life policy paid for by the company would usually be treated as a taxable benefit instead. Treatment depends on your circumstances and on the plan meeting the conditions, so confirm it with your accountant.