Relevant Life Insurance Explained for Company Directors

Relevant Life Insurance Explained: Tax Efficient Life Cover for Company Directors and Employees

If you run a company or you are a director, you have probably heard someone mention relevant life insurance and wondered if it is just another complicated insurance product with a fancy name. In practice, it is much simpler than it sounds.

Relevant life insurance is a way for a company to provide life cover for an employee or a director, with the payout going to their loved ones if they die during the term of the policy or if they are diagnosed with a terminal illness.

It is often described as a type of death in service benefit but set up on an individual basis rather than through a large group scheme.

What is relevant life insurance

A relevant life policy is a single life term assurance plan. The company takes it out on the life of an employee, which can include a director.

The company pays the premiums, and the cover is written into a trust so that if a claim is paid, it goes to the employee’s chosen beneficiaries rather than into their estate.

It is designed to provide a tax efficient way of offering death in service style benefits where a full group scheme is not suitable.

Can A Limited Company Director Have Relevant Life Insurance?

Yes. One of the most common uses of relevant life insurance is for directors of limited companies.

Provided there is an employer and employee relationship with the company, many directors can arrange relevant life cover through their business rather than paying for life insurance personally.

This can make the cover significantly more tax efficient compared to paying premiums from post-tax personal income.

This is one of the reasons relevant life policies are particularly popular among owner-managed businesses.

Can Shareholders Have Relevant Life Insurance?

Potentially. The key requirement is usually that there is an employer and employee relationship with the company.

Many owner-managed businesses have directors who are also shareholders, and relevant life insurance can often be arranged in these circumstances.

However, eligibility can vary between insurers and business structures, so it is important to obtain advice before proceeding.

Key Features Of A Relevant Life Policy

• The company pays the premiums
• The cover is for death and usually terminal illness
• The payout goes to the employee’s family or financial dependants through a trust

This is why people sometimes refer to it as company paid life insurance, although technically it is a specific type of plan with certain rules that need to be followed.

Who is relevant life insurance for?

Relevant life insurance tends to suit smaller businesses and companies where a group life scheme would be expensive or impractical.

It is also popular with working directors, especially where there are only one or two people in the business who need cover.

You might consider it if any of the following sound like you:

• You have a limited company and you are a working director who wants life cover paid for by the business
• You employ staff and you want to provide a meaningful benefit without setting up a full group scheme
• You have only a handful of employees, or even just one, so a group policy feels like overkill
• You want death in service style cover that does not sit within pensions allowances

We find it often appeals to directors who have a mortgage and family responsibilities and want to keep personal monthly outgoings lower by paying for protection in a more efficient way through the company.

Who cannot usually use relevant life insurance?

This is important because not everyone is eligible in the same way. Relevant life plans generally require an employer and employee relationship.

Some people assume they can take one out as a sole trader or as a partner and this is where disappointment can creep in.

Eligibility can vary by insurer, but relevant life is typically not available for:

• Sole traders for their own cover
• Equity partners of a partnership for their own cover
• Equity members of an LLP for their own cover

However, those business types may still be able to take out cover for employees.

What Does Relevant Life Insurance Cover?

Relevant life insurance is quite focused. It is not designed to be an all in one protection product.

Most relevant life policies cover:

• Death during the term of the policy
• Terminal illness, usually where life expectancy is 12 months or less, depending on insurer rules

It does not usually include critical illness cover, and it is not designed for long term sickness protection.

It is also a term policy, which means it has no investment element and no cash value. You pay for cover for a set period, and if you do not claim, the policy ends.

Relevant Life Insurance Vs Personal Life Insurance

Both types of policy provide life cover, but they are funded differently.

With personal life insurance:

• You pay the premiums personally
• Payments are usually made from post-tax income
• The policy belongs to you

With relevant life insurance:

• The company pays the premiums
• Premiums may qualify as a business expense
• The policy is written into trust
• The benefit is designed for employees or directors

For many company directors, relevant life insurance can provide the same protection as a personal policy while potentially offering significant tax advantages.

How Much Relevant Life Insurance Can You Have?

The amount of cover is usually based on a multiple of remuneration. This can include salary and, for directors, may include dividends depending on the insurer and how the income is structured.

There is not usually a statutory cap, but insurers apply their own limits based on age and earnings. In real life, the discussion tends to revolve around what would genuinely help your family if the worst happened.

If you were not here tomorrow, what would your partner need to keep the home, pay the bills, and have time to adjust? That normally leads to a sensible figure far quicker than trying to work backwards from maximum multiples.

To find out a suitable amount of cover for your situation, speak with an adviser.

How Much Does Relevant Life Insurance Cost?

The cost of relevant life insurance depends on several factors, including:

• Your age
• Your health
• Whether you smoke
• The amount of cover required
• The policy term

Because premiums are calculated individually, there is no standard cost.

In many cases, younger applicants in good health can obtain substantial levels of cover for relatively modest monthly premiums.

An adviser can help you compare insurers and obtain accurate quotations based on your circumstances.

What Are The Tax Benefits Of Relevant Life Insurance?

When set up correctly, relevant life insurance premiums are usually treated as a business expense.

In many cases, there is no benefit in kind charge for the employee and no National Insurance on the premiums.

The payout can also be paid to beneficiaries in a way that is normally outside of the employee’s estate because it is written in trust.

Tax treatment depends on individual circumstances and can change, so you should always take tax advice.

But as a general principle, relevant life can be significantly more efficient than paying for a personal life policy from your own income.

The tax efficiency only works when it is set up properly and for the right reasons. If it is forced into place where it does not fit, it can create problems.

A Simple Example

Imagine a director wants £500,000 of life cover.

If they arrange a personal life insurance policy, the premiums would usually be paid from income that has already been subject to tax.

With a relevant life policy, the company may be able to pay the premiums directly, potentially reducing the overall cost of providing the same level of cover.

The exact tax treatment depends on individual circumstances and professional tax advice should always be obtained.

This makes the benefit much more tangible.

Why the trust matters and what it does

The trust is the part that puts many people off at first, because it sounds legal and complicated. In reality, it is usually straightforward.

The trust exists so that:

• The payout goes directly to your chosen beneficiaries
• The funds do not usually get tied up in probate
• The benefit is normally kept outside your estate for inheritance tax purposes

You will normally choose who you want to benefit, such as a partner, children, or other dependants.

Trustees are appointed to manage the trust, which is often you and another trusted person.

What happens if the employee leaves the business

This is another area where people worry that they will lose everything they have paid for.

In many cases, if the employee leaves, the cover arranged by the employer will stop because the employer employee relationship has ended.

Some policies may allow the trustees to assign the plan to the employee so they can continue it personally, although this depends on the provider and the circumstances.

If you are a director and you expect changes in the future, such as selling the company or moving to a new business, it is worth discussing this before you set the policy up.

What Happens If I Sell Or Close My Company?

If the company stops trading or you leave the business, the policy may not automatically continue in the same way.

Depending on the insurer, it may be possible to transfer ownership of the policy or arrange alternative cover.

The options available will depend on the insurer’s rules and the circumstances at the time.

This is one of the reasons it is important to review protection arrangements whenever major business changes occur.

This is a surprisingly common search query.

Relevant Life Insurance Vs Death In Service

Relevant life insurance is often described as an individual version of death in service cover.

Traditional death in service schemes are usually arranged for larger groups of employees through a company-wide scheme.

Relevant life insurance can provide similar protection but on an individual basis.

This makes it particularly useful for:

• Small businesses
• Family businesses
• Director-only companies
• Businesses with only a handful of employees

For many smaller firms, it offers a practical alternative to setting up a full group scheme.

How relevant life compares to group life insurance

Group life schemes are common in larger companies. They can be excellent, but they usually require a minimum number of employees and come with administration.

Relevant life is different because:

• It is set up individually
• Underwriting may be done per person
• It can be used even if you only want to cover one or two people

For small businesses, that flexibility is often the reason it works.

Frequently Asked Questions About Relevant Life Insurance

Is relevant life insurance worth it?

For many directors and small business owners, relevant life insurance can provide valuable life cover in a tax-efficient way.

Can a company director have relevant life insurance?

Yes. Many limited company directors use relevant life insurance to arrange life cover through their business.

How much does relevant life insurance cost?

Premiums vary depending on age, health, smoking status, policy term and the amount of cover required.

Does relevant life insurance pay out for critical illness?

Normally no. Relevant life insurance is generally designed to provide life cover and terminal illness cover only.

Is relevant life insurance a benefit in kind?

In many cases it is not treated as a benefit in kind, although tax treatment depends on individual circumstances.

Can the company be the beneficiary?

No, relevant life plans are set up to benefit individuals or charities, usually through a trust. They are not designed as business protection.

Can I add critical illness cover?

Normally no. Relevant life is typically restricted to life cover and terminal illness.

What happens if I leave the company?

Depending on the insurer, there may be options to transfer or continue the cover, although this varies between providers.

Is relevant life insurance better than personal life insurance?

Not necessarily. The most suitable option depends on your circumstances, but relevant life insurance can be more tax efficient for some directors and business owners.

Conclusion

Relevant life insurance can be a highly tax-efficient way for limited company directors and businesses to provide valuable life cover for employees and their families.

For many small businesses, it offers the benefits of death in service cover without the cost or complexity of a group scheme.

When structured correctly, it can provide meaningful protection while making effective use of company funds.

If you are considering relevant life insurance and you want to know whether it fits your business, speak to Kerr & Watson.