- A relevant life policy is single-life cover a company buys for one director or employee, like death-in-service for small companies.
- Premiums are usually deductible for Corporation Tax and are not normally a taxable benefit-in-kind, with no National Insurance on them.
- The payout is held in a discretionary trust, so it is generally free of income tax and inheritance tax.
- It does not count towards the pension lifetime or lump-sum allowances.
- Because the company pays from pre-tax money, the same cover can cost noticeably less than personal cover.
Illustrate the cost
What a relevant life policy is
A relevant life policy is single-life cover the company buys for one named individual, typically a director or a key employee. If that person dies (or, on some policies, is diagnosed with a terminal illness) during the term, a lump sum is paid out to their family via a trust.
It mirrors the death-in-service benefit large employers offer through a group scheme, but it is designed for small companies that do not have one, including single-director limited companies.
Why it's structured to be tax-efficient
The appeal is in how the money flows. For a typical arrangement:
- The company pays the premiums, and they are usually treated as an allowable business expense (deductible for Corporation Tax), subject to the "wholly and exclusively" rule
- The premiums are not normally a taxable benefit-in-kind on the individual, and there is no employee or employer National Insurance on them
- The payout is held in trust and is generally free of income tax and inheritance tax
Contrast that with paying for equivalent personal cover out of already-taxed income. Because the company pays from pre-tax money, the effective cost of the same level of cover can be materially lower. The exact saving depends on your Corporation Tax rate and personal tax position, which the illustration above shows.
The discretionary trust
A relevant life policy is written into a discretionary trust from the outset. This is what keeps the payout outside the company's hands and outside the individual's estate for inheritance tax, so the proceeds go to the chosen beneficiaries rather than through the company or the estate.
Setting the trust up correctly at the start is essential. It is not an optional extra. Most providers supply the trust documentation alongside the policy.
Who it tends to suit
A relevant life policy is often considered by:
- Limited company directors who want life cover but have no group death-in-service scheme
- Small companies with a handful of employees, where a full group scheme is not practical
- Higher earners who would otherwise pay for personal cover from heavily-taxed income
- People who want cover that does not count towards the pension lifetime or lump-sum limits
Whether it is the right structure for you depends on your circumstances. This is information about how the product works, not a recommendation to buy one.
Versus personal life cover
The two are not mutually exclusive, and which makes sense depends on the numbers:
- Personal life cover. You pay from post-tax income, you own the policy, and it is fully portable if you change jobs or close the company.
- Relevant life policy. The company pays from pre-tax money, it is tied to your employment with that company, and it ends if you leave (though it can often be ported to a new employer or made personal).
For a company director the relevant life route is frequently cheaper for the same cover, but the trade-off is the link to the company. Compare the all-in cost both ways before deciding.
What it doesn't do
A relevant life policy is life cover, not a savings or investment product, so it has no cash-in value. It also is not the right tool for every protection need. Covering a business loan, a co-shareholder's stake, or income if you are too ill to work are different problems with different products (and different tax treatment).