What Is a Relevant Life Policy?

A relevant life policy is a life insurance policy taken out and paid for by a limited company on the life of an employee or director. If the person covered dies (or is diagnosed with a terminal illness) during the policy term, a lump sum is paid to their family or dependants through a discretionary trust.

How it works

The company owns the policy and pays the premiums. The policy is written into a discretionary trust from day one, so any payout goes directly to the beneficiaries, usually a spouse, partner or children, rather than into the company or the estate.

Why directors use it

Because the company pays, the premiums are normally an allowable business expense: they usually qualify for corporation tax relief, are not treated as a P11D benefit in kind, and carry no employee or employer National Insurance. Paying for the same cover personally means using income that has already been taxed.

What it covers

Death and, with most insurers, terminal illness. It does not include critical illness cover or income protection, those are separate products.

Key facts

• Available to employees and directors of UK limited companies, not sole traders
• Cover is typically available up to a multiple of your total remuneration (salary, dividends and benefits)
• The payout is normally free of income tax and, because of the trust, usually outside your estate for inheritance tax
• Cover is personal to you, if you leave the company the policy can usually be transferred

How it compares to other options

A relevant life policy is often weighed up against personal life insurance, death-in-service cover from a workplace scheme, and shareholder protection. The main difference is who pays and how the premium is treated for tax. Personal life insurance is paid from income that has already been taxed. Death-in-service cover through a group scheme depends on the employer running one, and usually stops if you leave the company. Shareholder protection serves a different purpose, it protects the business if a shareholder dies, rather than paying out to the family.

Common questions

Can more than one director in the same company have a policy?

Yes. Each eligible director or employee can normally have their own relevant life policy, each written into its own discretionary trust.

What happens if I leave the company?

Cover taken out through one employer does not automatically move with you. Most policies can be reassigned, or a new one set up, if you join another company, subject to underwriting.

Is a medical needed?

Underwriting is usually the same as for a personal life insurance policy, insurers ask health and lifestyle questions and may request a medical depending on the level of cover and your circumstances.

This page is for information only and does not constitute financial advice. To find out whether a relevant life policy is right for your circumstances, speak to a qualified financial adviser.

Where the money actually goes

The premium is paid by the company directly to the insurer. It never passes through payroll, so it is not salary, not a dividend, and, where the policy is set up correctly, not a P11D benefit in kind either. That single routing difference is the whole basis of the arrangement: the same cover, bought with money that has not been through income tax and National Insurance first.

What the trust is doing

The policy is written into a discretionary trust from the outset. The company owns and pays for the policy, but the trust decides who receives the money. In practice the director names a beneficiary class, usually spouse, children and dependants, and the trustees pay the claim to them. Because the trust holds the benefit, the lump sum is normally paid outside the estate rather than through probate, which is also why it typically falls outside inheritance tax. Setting the trust up at the point of application matters; retro-fitting one afterwards is not always possible and can create a chargeable transfer.

What it does not cover

A relevant life policy is life cover, plus terminal illness benefit on most contracts. It is not critical illness cover, not income protection, and not key person insurance. It pays on death, to the family, not to the business. Directors who want the company itself protected against the financial loss of a key individual need a separate key person policy, which is taxed differently. Some insurers offer a critical illness element alongside, but that portion generally does not qualify for the same treatment, worth checking rather than assuming.

When it stops

Cover is linked to employment. If the director leaves the company, the policy does not automatically follow. Most contracts allow the policy to be reassigned to a new employer or converted to a personal plan without fresh underwriting, but the window and the terms vary by insurer. Policies also run to a maximum age, commonly 75, rather than for life, so it is term assurance rather than whole-of-life cover.

Related guides

• Who Qualifies for a Relevant Life Policy?
• Tax Benefits of a Relevant Life Policy
• Who Can Take Out a Relevant Life Policy?
• How to Set Up a Relevant Life Policy