Relevant life insurance a guide for directors and employees

Relevant life insurance is a type of life insurance that a limited company takes out and pays for on behalf of a director or employee, instead of the individual arranging cover personally and paying for it from their own income. It gives company directors and employees a tax-efficient route to personal life cover, funded by the business rather than the individual.

Here's how it works in practice:

• The company applies for the policy and pays the premiums as a business expense
• The policy is written into trust from the outset, so the payout is designed to sit outside the company's assets and outside the employee's estate
• If the person covered dies, or is diagnosed with a terminal illness (usually defined as a life expectancy of under 12 months), the trustees pay a tax-free lump sum to their family or nominated beneficiaries
• Cover normally ends when the person leaves the company or reaches the age set out in the policy, whichever happens first

Relevant life insurance exists mainly to give directors of small and medium-sized companies, and employees who fall outside a group life scheme, access to a similar tax-efficient death-in-service benefit to the one larger employers can offer through group cover.

The main difference between life insurance and relevant life insurance is who pays for the policy and how it's taxed. A personal life insurance policy is bought and paid for by an individual from their own, already-taxed income. A relevant life policy is bought and paid for by a limited company on behalf of a director or employee, and is normally treated as a business expense rather than personal income.

Both types of policy can be written into trust, but a relevant life policy is trust-based by design, while a personal policy only sits outside your estate if you arrange a trust yourself. If your company doesn't run a group life scheme, comparing relevant life insurance against a personal policy is usually the first step before deciding which route suits your circumstances.

Relevant life insurance is only available where there's an employer-employee relationship for the policy to sit within, so eligibility comes down to how you're set up rather than the size of your business.

Typically eligible:

• Limited company directors, including sole directors of their own company
• Salaried employees paid through the payroll, including family members who are genuinely employed and paid a salary by the company
• Companies of any size, including businesses with just one or two employees

Not eligible:

• Sole traders, because there's no separate company to act as the policyholder
• Equity partners in a partnership
• Members of a limited liability partnership (LLP)
• Self-employed individuals who haven't set up a limited company

If you're not sure whether your business structure qualifies, an advisor can check your circumstances against current provider criteria before you apply.

A relevant life plan is designed to cover a single, clearly defined event: the death of the person insured, or a diagnosis that means they're not expected to live much longer. It isn't intended to replace broader protection cover such as income protection, though a small number of providers now offer limited add-ons.

Standard exclusions typically include:

• Death by suicide within an initial period after the policy starts, usually the first 12 months
• Death or injury from high-risk activities or hobbies that weren't declared when the policy was taken out
• Dangerous occupations that fall outside the insurer's standard underwriting criteria
• Claims involving false or incomplete information given at application

A common question is whether relevant life insurance can include critical illness cover. As standard, it can't: a relevant life plan is built around death and terminal illness only. A small number of providers now offer limited serious or critical illness options as an add-on, but this varies significantly between insurers, and not every provider offers it. If critical illness cover matters to you, it's worth checking this specifically with an advisor before choosing a provider, or considering a separate income protection for company directors policy alongside your relevant life cover.

The tax treatment of relevant life insurance is the main reason many limited company directors choose it over a personal policy. Because the company pays the premiums directly, rather than the individual paying from income that's already been taxed, a relevant life policy can be more tax-efficient for both the company and the person covered, though the exact position depends on your company's circumstances and current tax rules.

To see the mechanism at work, consider a simplified illustrative example, not financial or tax advice: an individual paying for life cover personally has to earn enough gross income to cover the premium after income tax and National Insurance have already been deducted. A company paying the equivalent premium through a relevant life policy can usually treat it as a business expense, without that same additional tax deducted along the way. The actual saving for your business depends on its corporation tax position, the director's or employee's income tax band, and the tax rules in force at the time, so it's worth confirming the exact figures with an accountant or advisor rather than relying on generic examples.

Tax treatment of relevant life insurance is set out in guidance from HM Revenue & Customs, and it can change from one tax year to the next. This page is general guidance, not personal tax or financial advice, and your company's individual circumstances will affect what applies to you.

There's no fixed cost for relevant life insurance, because providers price each policy individually. The main factors that influence the premium include:

• The age of the person being covered
• Their health and medical history
• The sum assured (the amount the policy would pay out)
• The length of the policy term
• Their occupation, particularly if it involves higher risk

Because relevant life insurance is usually paid for by the company rather than the individual, and the premiums aren't normally treated as a taxable benefit in kind, the effective cost to the person covered is often lower than taking out an equivalent personal policy, even where the premium itself is similar. It's important to keep up premium payments, though: if the company stops paying, the policy can lapse and the cover is lost, in the same way any life insurance policy would end if premiums aren't maintained.

If your company already offers, or is considering, a group life or death-in-service scheme, it's worth comparing this against relevant life insurance before deciding which route to take. Group life schemes typically require a minimum of around five employees to be set up, which puts them out of reach for many small companies and single-director businesses. Relevant life insurance doesn't have this minimum, which is why it's often the practical option for smaller employers.

Relevant life insurance is typically worth considering if you're a limited company director or a small business with fewer than five employees, since it offers a tax-efficient way to provide personal life cover without meeting the minimum size for a group life scheme. It's less likely to be the right fit if you're a sole trader, an equity partner, or if your company already offers group life cover that meets your needs.

Whether it's worth it for you specifically depends on your company's tax position, how many people need cover, and whether critical illness protection or broader income protection matters more than a straightforward death benefit. Because tax treatment and provider terms vary, and legislation can change, it's worth comparing options with an advisor rather than assuming one provider's plan is automatically the best fit for your circumstances.

If you're dealing with a wider financial difficulty alongside this decision, MoneyHelper (0800 138 7777) offers independent guidance backed by the government.

We compare relevant life insurance across a wide range of providers on your behalf, rather than steering you toward one insurer's own plan. That means the starting point is your company's circumstances and the cover you actually need, not a single product.

You can access expert advice with no pressure to proceed at any stage, and walk away at any point with no obligation. Insurers offering relevant life insurance in the UK are typically authorised and regulated by the Financial Conduct Authority.

This guide sits alongside our wider life insurance pillar page, where you can read about how life insurance works more generally, or compare the best life insurance providers across the market. If you're weighing up wider protection for your business, our key person insurance for business owners guide explains what happens if a key individual can't work, and our directors' and officers' liability insurance guide covers your personal liability as a director. You can also read more about business insurance for limited companies generally, or compare income protection for company directors if you want cover for loss of income alongside a death benefit.