Relevant Life Policy vs Death in Service: Which Is Better?
Tax Warning: The benefits to the treatment of tax will depend on your individual circumstances and may be subject to change in future.
Information Only: Please note that this is for information only and is not financial advice.
Personal Experience: This is based on our personal experience and are not guaranteed.
If you run a limited company or are a senior employee, you have probably heard both terms used. A relevant life policy and death in service are both forms of life cover arranged and paid for by an employer. But they are structured very differently, and the difference matters more than most comparisons suggest.
Neither is “better” in absolute terms. What works depends on your employment status, your company structure, how much you already hold in pensions, and what the money is actually needed for. Here is how they differ.
What Is Death in Service?
Death in service is group life cover arranged by an employer. If you die while employed, a lump sum is paid to your beneficiaries, usually a multiple of salary, commonly between two and four times annual earnings, though some schemes offer more.
The employer pays the premiums and the cover is tied to your employment. When you leave the job, the cover ends. There is normally no option to take it with you.
Most schemes are written under trust, so the lump sum is typically paid outside your estate and free of inheritance tax. Cover is usually provided without individual medical underwriting, which is a real advantage if your health would make personal cover difficult or expensive to obtain.
What Is a Relevant Life Policy?
A relevant life policy is a single-life death-in-service arrangement that a company sets up for an individual employee or director. The company owns the policy and pays the premiums.
Importantly, the death benefit is not paid to the company. To qualify as a relevant life policy under the conditions in section 393B of the Income Tax (Earnings and Pensions) Act 2003, the policy must be written into a discretionary trust from the outset, and the benefit must be payable to the employee’s family, dependants or a charity. The employer cannot be a beneficiary. If the company could benefit, the arrangement would fail the relevant life conditions and lose its tax treatment.
This is the single most common misunderstanding about relevant life cover. A policy designed to pay the business, to clear a director’s loan, cover a business debt, or fund a share purchase from the deceased’s estate, is a key person policy or shareholder protection arrangement. Those are different products with different tax treatment, and they are not interchangeable with a relevant life policy.
The Qualifying Conditions
A relevant life policy must meet a defined set of conditions. In broad terms:
- It must provide life cover only. Critical illness cover, terminal illness benefit beyond the permitted definition, disability benefit and any investment element are not allowed.
- Benefits must be payable on death (or on terminal illness within the permitted terms) before age 75, so cover has to end by then.
- The policy must have no surrender value at any point.
- Benefits must be paid through a discretionary trust to individuals or a charity, not to the employer.
- Tax avoidance must not be a main purpose of the arrangement.
These conditions are why relevant life policies are narrower than a general life policy, and why the wording and trust must be set up correctly from the start rather than corrected later.
Tax Treatment
The tax position is a genuine advantage of relevant life cover, but it is frequently overstated. The accurate position is:
Corporation tax. Premiums are generally allowable as a business expense provided they satisfy the “wholly and exclusively for the purposes of the trade” test. This is not automatic or guaranteed. Relief is a matter for HMRC and can be challenged, particularly where the level of cover is disproportionate to the individual’s remuneration or where the arrangement looks like a reward for shareholding rather than employment.
Benefit in kind. Premiums paid by the employer are not normally treated as a taxable benefit in kind for the employee, so there is usually no P11D entry and no employee income tax or National Insurance on the premium.
Inheritance tax. Because the benefit is held in a discretionary trust, it does not usually form part of the employee’s estate. Discretionary trusts can be subject to periodic and exit charges in principle, though in practice the trust normally holds no value until a claim and pays out shortly afterwards.
Lump sum allowance, the point most comparisons miss. Death in service provided through a registered group life scheme counts towards the Lump Sum and Death Benefit Allowance, currently £1,073,100. Pension death benefits count against the same allowance. A relevant life policy is a non-registered arrangement and does not. For a director with substantial pension savings and a generous group scheme, this can be the deciding factor between the two, and it is worth modelling before assuming death in service is sufficient.
Is death in service taxable? A lump sum payout from an employer’s registered death in service scheme is generally paid free of income tax to named beneficiaries. When written under a discretionary trust, the payout also normally sits outside the director’s estate, avoiding inheritance tax. However, because registered group life schemes count towards the Lump Sum and Death Benefit Allowance (LSDBA), any benefits exceeding this limit may trigger income tax charges at the beneficiary’s marginal rate.
Tax treatment depends on individual circumstances and on current legislation and HMRC practice, both of which can change. The position described here reflects our understanding as at August 2026.
Control and Flexibility
With death in service, the employer sets the level of cover and the scheme rules. You typically complete an expression of wish nominating beneficiaries, but the trustees retain discretion. The scheme is designed around the workforce as a group, so you cannot tailor it to your own circumstances.
With a relevant life policy, the level of cover is chosen for the individual, and you nominate beneficiaries through the trust. Trustees still hold discretion, that discretion is what keeps the benefit outside the estate, but the arrangement is built around one person rather than a whole workforce.
What a relevant life policy does not give you is control over where the money goes as a business asset. It cannot be used to settle company liabilities or fund a shareholder buyout. If those are your objectives, you need key person cover or a shareholder protection arrangement alongside it, not instead of it.
Portability
Death in service ends when your employment ends. Move employer, retire or leave the business and the cover stops. Some schemes offer a limited continuation option, but this is not standard.
A relevant life policy is owned by the employing company, so it is also tied to employment, but it behaves differently on exit. Many providers allow the policy to be assigned to the individual or to a new employer without further medical underwriting, subject to the provider’s terms. That matters most if your health has changed since the policy started. What the company cannot do is continue paying premiums for someone who is no longer an employee and still expect the tax treatment to hold.
Sum Assured
Death in service usually pays a fixed multiple of salary, so cover moves automatically with earnings. If the scheme provides four times salary and you need more, the scheme will not flex for you.
A relevant life policy allows the sum assured to be set for the individual. In practice, insurers apply their own multiples, commonly a multiple of total remuneration including dividends, often scaled by age, and HMRC will look at whether the level of cover is commercially justifiable relative to the individual’s remuneration package. So it is more flexible than a group scheme, but it is not unlimited.
Who Pays
Under both arrangements the employer pays. With death in service there is no cost to you personally. With a relevant life policy the premium comes out of company profits, with corporation tax relief generally available as described above.
A relevant life policy requires an employer/employee relationship. That means it works for directors of limited companies and for employees. A sole trader cannot take a relevant life policy on themselves, because they are not an employee of a business. Equity partners in a partnership or LLP are in the same position with respect to themselves, though both can arrange relevant life cover for their employees.
Who Suits Death in Service?
Death in service works well if you are an employee with straightforward circumstances, a stable job, a clear salary, and a need for basic family protection at no personal cost. Cover is usually automatic, with no medical underwriting, which is particularly valuable if you have health conditions that would make individual cover expensive or unavailable.
Who Suits a Relevant Life Policy?
A relevant life policy is more likely to suit you if you are a director of a limited company with no group scheme available, or if you run a company too small to set up a group arrangement. It also suits directors whose remuneration is largely taken as dividends, since insurers will often base cover on total remuneration rather than PAYE salary alone.
It is also worth considering where an existing group scheme is insufficient, or where you have significant pension savings and want death benefits that sit outside the Lump Sum and Death Benefit Allowance.
Can You Have Both?
Yes. Many people hold death in service through employment and arrange a relevant life policy or personal cover on top. Death in service provides a baseline; additional cover fills the gap. Where both are in place, it is worth checking the combined position against the Lump Sum and Death Benefit Allowance alongside any pension death benefits.
Making Your Decision
Start with what you actually need. How much cover, for whom, for how long, and to meet what liability? Then check what you already have: the level of any group scheme, how it is written, and what your pension death benefits would add.
Death in service is a simple, employer-provided group benefit for employees. A relevant life policy is a single-life, trust-based arrangement suited to directors and employees where no adequate group scheme exists. They serve different purposes, and for many company directors the sensible question is not which to pick but whether the combination leaves a gap.
Getting the trust and the policy wording right at outset is what determines whether the tax treatment holds, so this is not an area to arrange without advice.
Important information
This article is for general information only and does not constitute financial, tax or legal advice. It is not a personal recommendation and should not be relied upon when making a decision about life cover.
Tax treatment depends on your individual circumstances and on current legislation and HMRC practice, both of which may change in the future. Corporation tax relief on relevant life policy premiums is not guaranteed and is subject to HMRC’s “wholly and exclusively” test. The information here reflects our understanding of the rules as at August 2026.
Life insurance policies have no cash-in value at any time. If premiums are not maintained, cover will end and no benefit will be paid.
The suitability of any arrangement depends on your circumstances. You should speak to a qualified financial adviser before proceeding, and to an accountant or tax adviser regarding the tax position of your business.