Relevant life insurance is a form of death-in-service benefit that a company takes out on the life of an individual employee or director. The business pays the premiums, the benefit is written into a discretionary trust, and (provided the policy is set up correctly) neither the premiums nor the payout are treated as a benefit-in-kind. For directors and higher earners, it's one of the most tax-efficient ways to arrange personal life cover.

Adviser and company director discussing relevant life cover over coffee
Relevant life cover is usually arranged with advice, so the trust and remuneration multiples are set up correctly.

How it works

The company applies for and funds a single-life policy on a chosen employee or director. If that person dies: or is diagnosed with a terminal illness, usually defined as a life expectancy of 12 months or less: while employed and before age 75, the policy pays a tax-free lump sum into a discretionary trust, which then passes it to their family or nominated beneficiaries. It mirrors the death-in-service benefit larger employers offer through group schemes, but is arranged on an individual basis.

The tax advantages

This is where relevant life stands apart from a personal policy. With a personal policy, you pay premiums from post-tax income and the payout falls into your estate unless it's written in trust. With a relevant life policy:

  • The company pays the premiums, which are usually treated as an allowable business expense (so generally qualify for corporation tax relief).
  • The premiums are not a P11D benefit-in-kind, and there's no employer or employee National Insurance on them.
  • The benefit is paid through a discretionary trust, so it falls outside the employee's estate for inheritance tax.
  • It doesn't count towards pension allowances, unlike some older death-in-service arrangements.

Funded through the business rather than from personal post-tax income, the effective cost can be significantly lower than an equivalent personal policy (some illustrations suggest savings of around 40–50% for higher-rate taxpayers) though the exact figure depends on your tax position, and tax treatment can change.

A simple comparison

To fund £30 of personal life cover each month, a higher-rate taxpayer has to earn considerably more than £30 gross, because the premium is paid from income that has already been taxed and had National Insurance deducted. Pay the same cover through the company as a relevant life policy and the premium is met before those deductions, with corporation tax relief on top. The cover is the same; the route to paying for it is simply more efficient. (Figures here are illustrative only.)

Company director reviewing financial documents in a London office
For directors and higher earners, funding cover through the business can be markedly more efficient than paying personally.

How much cover can you get?

The maximum sum assured is set as a multiple of total remuneration, and the multiple reduces with age. As a rough guide, insurers often allow up to around 30 times remuneration for those under 40, around 20 times in your forties, and around 15 times from age 50. One important detail for directors: insurers differ on whether dividends count towards "total remuneration", so if you take a low salary and most of your income as dividends, the cover available may be lower than you expect. It's worth checking before you apply.

Who can use it?

Relevant life policies are available to employees and directors of limited companies: including sole directors of their own company and contractors operating through their own personal service company, provided they're on the payroll. They cannot be used by sole traders or by equity partners and members of partnerships or LLPs, because there's no employer-to-employee relationship.

Corporate policy document and pen ready for signature
The policy must be written into a discretionary trust from the outset for the tax treatment to apply.

The trust requirement

For the tax treatment to work, the policy must be written into a discretionary trust from the outset. The trust keeps the payout outside the insured's estate, avoids probate delays, and ensures the money reaches the intended people. The insured typically leaves a letter of wishes indicating their preferences, while the trustees retain legal discretion. Relevant life policies are usually portable, so they can move with the employee to a new employer without a break in cover.

Relevant life or group death in service?

Group death-in-service schemes make sense for larger employers covering many staff. Relevant life tends to suit small companies and directors where there are too few employees to justify a group scheme, or higher earners who want additional cover on top of an existing scheme without it affecting their pension position.

When it might not be the right fit

Relevant life is purely life (and terminal illness) cover: it doesn't provide critical illness benefits, and it ends when employment ends or at age 75. If you need broader protection, or you're a sole trader or partner who can't use it, a personal policy or other business cover may suit you better. As ever, the right answer depends on your structure and goals.

The bottom line

For company directors and employees, relevant life cover can deliver personal life insurance at a markedly lower effective cost than paying for it personally, with the added benefit of falling outside the estate for IHT. The trust must be set up correctly and the remuneration multiples checked, so this is worth arranging with proper advice. Tax treatment depends on individual circumstances and may change.