A relevant life policy can be a useful tool for UK limited company directors and employees who want to protect their business and family. But not everyone can take one out. There are specific rules about who is eligible, and understanding them matters before you explore whether this type of insurance is right for you.
The Core Eligibility Rule: You Must Be an Employee or Director
The fundamental requirement is straightforward: you must be an employee or director of a UK limited company. The policy is written by the company itself, not by you personally. This is different from personal life insurance, which you buy as an individual.
The company becomes the policyholder and the beneficiary. This means the company owns the policy and receives the payout if you die. That payout then flows to your beneficiaries through your estate or via whatever arrangements the company has in place.
This structure matters for tax purposes. When a relevant life policy pays out, the money goes to the company tax-free. The company then uses that money to pay your dependants, settle business debts, or cover other costs. This is why the arrangement works differently from personal life insurance.
Sole Traders Cannot Have a Relevant Life Policy
If you run your business as a sole trader, you cannot take out a relevant life policy. The policy must be held by a limited company, not by you personally.
This is a hard boundary. It exists because a relevant life policy relies on the company structure to work properly. The tax treatment and the way the policy functions depend on there being a separate legal entity (the company) that is distinct from you as an individual.
If you are a sole trader and want life insurance protection for your business, you would need to look at personal life insurance instead. This is a different product with different tax implications and rules. A financial adviser can explain the options available to you.
Age Limits: When You Can and Cannot Apply
Most relevant life policies have age restrictions. You typically need to be at least 18 years old to apply. There is usually an upper age limit as well, though this varies between insurance providers.
Some insurers will consider applications from people in their 60s or 70s, while others may have a cut-off point earlier. You will need to check with individual insurers or speak to a broker to find out what they offer.
If you are approaching retirement or are already retired but still a company director, you may find the market more limited. Some insurers are unwilling to write policies for people nearing the end of their working life. This is worth investigating early if you think you might need cover.
Controlling Directors: Special Rules Apply
The rules become more complex if you are a controlling director of the company. A controlling director is someone who owns more than 50 per cent of the company’s shares, either alone or together with an associate.
HMRC has specific rules about relevant life policies for controlling directors. The key issue is that the policy must be genuinely for the benefit of the company and its business, not purely for personal benefit.
If you are a controlling director, the company must be able to demonstrate a genuine business reason for the policy. This might include protecting the company against loss of key management, funding a buy-sell agreement if you were to die, or covering business debts. The policy cannot simply be a way to get money into your hands on a tax-advantaged basis.
HMRC looks closely at this. If the arrangement looks like it is primarily designed for your personal benefit rather than the company’s, the tax treatment may be challenged. This is why professional advice is essential if you are a controlling director considering a relevant life policy.
Non-Controlling Directors and Employees
If you are a director but do not control more than 50 per cent of the company, the rules are more straightforward. You can take out a relevant life policy more easily, provided you meet the other basic requirements (being over 18, being in reasonable health, and so on).
Employees who are not directors can also have a relevant life policy taken out by the company. This is common in larger organisations where the employer wants to protect against the loss of key staff members.
In both cases, the company must have a genuine business reason for the policy. But the HMRC scrutiny is less intense than it is for controlling directors.
Health and Underwriting
Beyond the structural eligibility rules, you will need to meet the insurer’s health requirements. Most insurers will ask you health questions when you apply. Some may require a medical examination, depending on the amount of cover you are seeking.
If you have significant health issues, some insurers may decline to offer cover. Others may offer cover at a higher premium. This is between you and the insurer.
It is worth being honest on any application forms. Providing false information about your health can invalidate the policy later, which defeats the purpose entirely.
Employment Status Must Be Genuine
You must actually be employed by or a director of the company. You cannot simply set up a company and immediately take out a policy. The employment or directorship needs to be real and ongoing.
If you are planning to leave the company soon, or if your role is not genuine, this will cause problems. The insurer needs to be confident that the arrangement is legitimate.
What Happens If You Leave the Company?
If you resign or are dismissed, you will normally cease to be eligible to be covered by the company’s relevant life policy. The policy will usually end when your employment ends.
Some policies have provisions that allow you to convert the cover into personal life insurance, but this is not automatic and depends on the policy terms. You would need to check with the insurer or your broker about what options exist.
Getting Professional Advice
The eligibility rules for relevant life policies are not particularly complicated, but the tax and business implications can be. If you are a controlling director, you especially need to understand how HMRC views the arrangement.
Before you apply for a relevant life policy, it is worth spending time with a qualified financial adviser or insurance broker. They can check whether you are eligible, explain whether the policy makes sense for your situation, and help you avoid any tax pitfalls.
An accountant familiar with your business can also help, particularly if you are a controlling director. They can advise on whether the policy fits with your overall business and tax planning.
Related guides
- Relevant Life Policy for Limited Company Directors
- Relevant Life Policy for IT Contractors and PSC Owners
- Relevant Life Policy for Husband and Wife Companies
- Who Qualifies for a Relevant Life Policy?
- Speak to an Adviser
This article is for information only and does not constitute financial advice. For advice tailored to your circumstances, speak to a qualified financial adviser.