At LDN Finance, we regularly advise directors and business owners on how life cover can be structured tax-efficiently. Relevant life insurance allows an employer to provide individual life cover for an eligible director or employee. The business pays the premiums, while the policy benefits are held in trust for eligible beneficiaries.
Many directors hold life cover personally and pay the premiums from income that has already been taxed. For some, this remains appropriate. For others, arranging a comparable level of cover through the business may provide a more tax-efficient funding structure, subject to the qualifying conditions and individual circumstances.
What Relevant Life Insurance Achieves
A relevant life policy is a form of life insurance arranged by a UK limited company on the life of a director or employee. The employer pays the premiums directly. The policy must also be established under a suitable Relevant Life trust from the outset, with the benefits held for eligible beneficiaries.
The arrangement sits within HMRC’s defined rules for company-funded life cover. Where the qualifying conditions are met, the funding arrangement may offer tax advantages over personally funded cover. The potential tax treatment is explained below.
How It Compares with Personally Held Cover
A personal policy funded from net income does not normally attract tax relief on its premiums. Whether its proceeds form part of the estate depends on its ownership and trust structure; a personal policy can also be written in trust, so this aspect should be compared on a like-for-like basis.
With Relevant Life insurance, the employer pays the premiums directly. Depending on the qualifying conditions and the employer’s circumstances, this may provide a more tax-efficient funding route than paying personal premiums from net income. The potential tax treatment is explained below.
Each Relevant Life policy is arranged for one person rather than forming part of a registered group scheme. It may therefore suit companies of different sizes, including some businesses with only one director, subject to the employment position, eligibility requirements and provider criteria.
The policy can generally be reviewed during the policy year. Some products also include guaranteed insurability options, allowing certain increases following specified events without further medical underwriting. Eligibility, limits and timeframes apply.
The Tax Position
Subject to the policy satisfying the relevant conditions and the expenditure meeting HMRC’s “wholly and exclusively” test, premiums paid by the company may be deductible when calculating the employer’s taxable profits. Tax relief is not guaranteed, and HMRC can challenge a deduction where the overall remuneration package is not considered commercially reasonable; each case is assessed individually.
A correctly structured Relevant Life policy that satisfies the qualifying conditions does not normally create a benefit-in-kind charge for the employee. Provided the arrangement satisfies the relevant conditions, policy benefits would not normally form part of the employee’s estate for inheritance tax purposes. However, the trust itself can have its own tax considerations, including possible periodic or exit charges in limited circumstances.
The tax treatment depends on HMRC’s rules and the circumstances of the employer and employee. Clients should obtain advice from their accountant or tax adviser where confirmation of the tax position is required.
Who This Is Designed For
Relevant life insurance may be available for employees and directors where a genuine employer-employee relationship exists. Eligibility can vary according to the business structure, employment status and provider criteria. Sole traders cannot arrange relevant life cover for themselves, although they may be able to arrange it for an eligible employee. Partners or LLP members should obtain individual advice, as their employment and tax status can affect eligibility.
Relevant Life insurance may be particularly relevant for:
- Business owners currently holding life cover personally, where the arrangement has never been reviewed against the alternative
- Senior employees of smaller companies, where a registered group scheme is not in place or would not suit one or two individuals
- Higher earners, where the tax treatment of premiums and the position of cover within the estate can carry material weight
Relevant life insurance is not suitable in every case, and the right approach within a wider protection and tax position should always be assessed individually.
The Role of the Trust
The policy must be established under a suitable Relevant Life trust from the outset. The person covered can usually indicate their preferred beneficiaries, but payment remains subject to the terms of the trust and the trustees’ discretion. Holding the policy in trust will generally allow the trustees to deal with the policy proceeds without waiting for a grant of probate in respect of the employee’s estate, although the insurer’s claims process and the administration of the trust must still be completed.
Trust arrangements should be reviewed periodically to ensure they remain aligned with personal circumstances as families and priorities change.
Part of a Wider Protection Strategy
Relevant life insurance is one of several structures available within a complete business protection plan. It is important to understand what a Relevant Life policy does and does not provide:
- It primarily provides life cover and may include a terminal illness benefit, subject to the policy definition
- It cannot ordinarily include critical illness or income protection within the same arrangement
- It is not designed for key person, shareholder or business loan protection. Those arrangements are intended to provide proceeds for the business, whereas Relevant Life benefits are held in trust for eligible individuals or charities
- It has no surrender value. Cover will end if premiums are not maintained, subject to the provider’s terms and any applicable grace period
For business owners, relevant life insurance can sit alongside shareholder protection, key person cover and personal protection arrangements, each addressing a distinct need. Our Protection team considers these arrangements together, so each policy addresses the right personal or business need.
What LDN Finance Considers in a Relevant Life Review
Relevant Life insurance should not be considered solely on the potential tax treatment. LDN Finance first establishes what the cover is intended to achieve, who needs to receive the proceeds, and whether the benefit is for the individual’s family or the business itself.
Our Protection team then considers the existing policy structure, the appropriate level and term of cover, the individual’s employment status, and provider eligibility and underwriting position. Where personal cover is already in place, its definitions, exclusions and cost are assessed before any replacement is recommended.
This distinction matters. Relevant Life cover may provide an efficient way to fund death-in-service benefits, but it is not a substitute for key person, shareholder or business loan protection. The right recommendation depends on placing each need within the correct arrangement.
Continuing Cover If Employment Changes
Depending on the policy terms, trustee approval and the provider’s procedures, there may be options to continue the cover personally or through a new employer if the person covered leaves the company. These options should be checked before employment ends, as portability is provider and policy specific.
Reviewing Cover That Has Never Been Revisited
Many directors hold life cover arranged early in their careers, or set up quickly alongside a mortgage and never revisited since. A protection review looks at the level of cover, the way it is held, the tax treatment of premiums and the position of the proceeds.
Where a replacement is appropriate, LDN Finance can coordinate the application so that existing cover is not cancelled until the new policy has been accepted and placed in force. Replacing an existing policy requires careful consideration of underwriting, exclusions, premiums and the loss of any existing policy benefits.
Frequently Asked Questions
What is relevant life insurance?
Relevant life insurance is a form of life cover an employer arranges for an eligible director or employee, with premiums paid by the business rather than the individual.
Who is eligible for relevant life cover?
Relevant life insurance may be available for employees and directors where a genuine employer-employee relationship exists. Eligibility can vary according to the business structure, employment status and provider criteria.
Can a sole company director arrange relevant life insurance?
Potentially. A limited company with one director may be able to arrange relevant life insurance for that director where the eligibility requirements are met. Availability remains subject to the employment position, provider criteria and underwriting.
Is relevant life insurance tax deductible?
Subject to the policy satisfying the relevant conditions and the expenditure meeting HMRC’s “wholly and exclusively” test, premiums may be deductible when calculating the employer’s taxable profits. Tax relief is not guaranteed and depends on the specific circumstances.
Is relevant life cover written in trust?
Yes. The policy must be established under a suitable Relevant Life trust from the outset. The person covered can usually indicate their preferred beneficiaries, but payment remains subject to the trust terms and the trustees’ discretion.
Does relevant life insurance include critical illness cover?
No. Relevant life insurance is primarily life cover and may include a terminal illness benefit, subject to the policy definition, but it cannot ordinarily include critical illness or income protection within the same arrangement.
What happens if the employee leaves the company?
Continuation options depend on the policy terms, trustee approval and the provider’s procedures. There may be scope to keep the cover personally or move it to a new employer, but this should be checked before employment ends.
How much relevant life cover can a director have?
The level of cover available depends on individual circumstances, including income and the provider’s underwriting criteria, and should be discussed directly with an adviser.
Is relevant life insurance the same as a group life scheme?
No. A registered group life scheme normally covers several employees under one arrangement, whereas relevant life cover is an individual, non-registered death-in-service policy. Eligibility, administration and the options for changing cover vary between providers and schemes.
Speak to LDN Finance
If you already hold life cover personally, or are considering arranging employer-funded life cover for the first time, our Protection team can review your position and explain whether relevant life insurance may be a more suitable structure for you and your business. We provide personalised illustrations comparing your current arrangement against a relevant life policy, so the decision is grounded in your own figures rather than general principles.
For advice on Relevant Life Cover for your business, or to explore our full range of protection solutions, contact LDN Finance to arrange an initial consultation.
Disclaimer
This article is for general information only and does not constitute personal financial or tax advice. The suitability of any planning approach or insurance solution depends on individual circumstances and should be discussed with a qualified adviser. Trusts are not regulated by the Financial Conduct Authority and may require legal advice depending on the specific structure.