Relevant life insurance, sometimes called a relevant life policy, is a life insurance arrangement that allows an employer to pay for an employee's life cover as a tax-efficient business expense. For company directors, it is one of the most cost-effective ways to arrange personal life insurance.
This article explains what relevant life insurance is, who qualifies, how the tax advantages work, and how it differs from other business protection products.
What Is Relevant Life Insurance?
A relevant life policy is a life insurance policy arranged and paid for by an employer on behalf of an individual employee. If the employee dies or is diagnosed with a terminal illness during the policy term, the payout goes to the employee's beneficiaries rather than to the business.
Crucially, the policy must be written in a discretionary trust from the outset. This ensures the payout goes directly to the beneficiaries without forming part of the deceased's estate, avoiding both probate delays and inheritance tax on the benefit.
Who Can Use a Relevant Life Policy?
Relevant life policies are available to:
- Company directors (including owner-directors of their own limited companies)
- Employees of limited companies, partnerships, and LLPs
- High earners who have used up their pension annual allowance and want additional life cover without worsening their pension position
Sole traders cannot use relevant life policies because there is no employer-employee relationship. Partners in a traditional partnership may be able to use them depending on the structure.
The Tax Advantages Explained
The tax benefits of a relevant life policy compared to a personally-owned life insurance policy are substantial:
- Premiums are an allowable business expense: the company can deduct the cost from its taxable profits, saving corporation tax at 25% (main rate from April 2023)
- Not treated as a benefit in kind: the employee does not pay income tax or National Insurance on the premium value
- No employer National Insurance: the company does not pay employer's NI on the premiums
- Payout is free of inheritance tax: because the policy is held in trust, it does not form part of the employee's estate
A concrete example: a director paying £150 per month from personal post-tax income gets no tax relief. The same cover arranged through a relevant life policy costs the company £150 per month but saves corporation tax of approximately £37.50 per month, reducing the effective cost to around £112.50.
How It Differs from Key Person Insurance
Relevant life insurance and key person insurance are both arranged by a business, but they serve different purposes. Relevant life insurance is for the benefit of the employee and their family. Key person insurance is for the benefit of the business. It pays out to the company to help cover the financial impact of losing a critical individual.
The tax treatment is also different. Key person insurance premiums are generally not tax deductible (the tax treatment is fact-specific and HMRC's approach depends on the purpose of the policy), whereas relevant life premiums are allowable expenses.
Frequently Asked Questions
Can a sole trader take out a relevant life policy?
No. A relevant life policy requires a genuine employer-employee relationship. Sole traders have no employee status and therefore cannot use this product. Limited company directors who are also employees of their own company do qualify.
Can a spouse or partner be covered under a relevant life policy?
Only if the spouse or partner is a genuine employee of the company and the policy is specifically for them as an employee. The policy must relate to an employment relationship, not simply a personal arrangement.
Does a relevant life policy affect my pension annual allowance?
No. Relevant life policies are not pension products and the premiums do not count towards the pension annual allowance. This makes them useful for individuals who have already maximised their pension contributions and want additional life cover.
Can I take the policy with me if I leave the company?
Yes, in most cases. Many relevant life policies include a continuation option that allows the policy to be transferred to the individual if they leave their employment. The premiums would then need to be paid personally, and the tax advantages would no longer apply. The policy terms should be checked before taking out cover.
Sources
- HMRC: Employment Income Manual (EIM15000 series)
- GOV.UK: Corporation Tax guidance
- Association of British Insurers: abi.org.uk
- FCA: FCA insurance consumer guidance
About the Author
Tanweer Hussain is the editor at TopQuote.co.uk. He oversees the editorial accuracy of all published content, with a particular focus on the factual detail relevant to UK protection insurance. TopQuote is authorised and regulated by the Financial Conduct Authority.
This article is intended for general information purposes only and does not constitute financial advice. Your individual circumstances will affect which options may be available to you. TopQuote.co.uk is a comparison and information service, not a financial adviser. Always seek independent financial advice from a regulated adviser before making any financial decisions.