What Is Relevant Life Insurance? A Complete Guide for Business Owners

Relevant life insurance is a tax-efficient life cover policy taken out by a business to provide financial protection for an employee or director’s family if they pass away while employed. It offers similar protection to personal life insurance but is paid for by the company, making it a cost-effective way for business owners to offer valuable employee benefits.

What Is Relevant Life Insurance?

Relevant life insurance is a type of life policy arranged and paid for by a company on behalf of an employee, director, or business owner. The policy pays out a lump sum to the employee’s beneficiaries if they die or are diagnosed with a terminal illness while employed. Unlike traditional group life insurance, it is designed for smaller businesses or directors who may not qualify for or need a group scheme.

The key advantage is tax efficiency. Premiums are typically treated as an allowable business expense, meaning they can be offset against corporation tax. For employees, the benefit is not classed as a benefit in kind, so there’s no income tax or National Insurance to pay.

To explore policy options, business owners can review their coverage options on the relevant life insurance page at My Key Man Insurance.

How Does Relevant Life Insurance Work?

A business takes out the policy on behalf of an employee or director. The company pays the monthly or annual premiums, but the cover is written into a trust for the benefit of the employee’s chosen beneficiaries, usually their family.

If the insured person passes away or is diagnosed with a terminal illness, the insurance provider pays out a lump sum to the trust, which then distributes the funds to the beneficiaries. This payout is typically free from income tax, corporation tax, and inheritance tax when the policy is correctly structured.

This setup ensures that the money reaches the employee’s family quickly and efficiently, without being tied up in the business or estate.

Why Business Owners Choose Relevant Life Insurance

For business owners and directors, relevant life insurance offers a way to protect loved ones while benefiting from significant tax savings. It is ideal for small businesses that want to provide a death-in-service benefit without the cost or complexity of setting up a group scheme.

Unlike personal life insurance, which is paid from post-tax income, the company pays the premiums, reducing the overall cost. For example, a higher-rate taxpayer could save up to 49 per cent compared to paying for a personal policy.

Additionally, offering such protection helps businesses attract and retain talented employees, as it provides reassurance that their families would be financially secure in the event of their death.

Relevant Life Insurance for Directors

Company directors often benefit the most from relevant life insurance because it allows them to protect their families in a tax-efficient way. The business pays the premiums directly, treating them as a deductible expense, and the cover is written in trust for the director’s chosen beneficiaries.

This means directors can enjoy the reassurance of personal life cover without paying from their own after-tax income. It is also a valuable way to demonstrate financial responsibility and ensure loved ones are cared for if the unexpected happens. Directors can also include additional benefits, such as terminal illness cover, to make their protection more comprehensive.

Who Can Take Out Relevant Life Insurance?

Relevant life insurance is available to company directors, even sole directors, as well as employees of limited companies and businesses that want to offer employee benefits.

It is not typically available to sole traders or partnerships without a limited company structure, as the policy must be paid through an employer-employee relationship. For company directors, it is one of the most efficient ways to protect their families while enjoying corporation tax relief.

Eligibility and Policy Exclusions

Most insurers offer relevant life insurance to individuals aged between 18 and 75 who are employed and paid through PAYE. However, sole traders or business partners without a limited company structure usually aren’t eligible. Some exclusions may also apply for hazardous occupations or pre-existing medical conditions, which can affect premiums or eligibility.

To ensure you qualify, it’s worth checking the insurer’s eligibility criteria before applying. Consulting a financial adviser can help you find the most suitable policy and avoid delays in approval.

Tax Benefits and Savings Explained

The tax advantages of relevant life insurance are among its most appealing features. Corporation tax relief means premiums are usually classed as an allowable business expense. Employees do not pay income tax or National Insurance on the premiums because they are not treated as a benefit in kind. When the policy is placed in a discretionary trust, the payout is typically free from inheritance tax.

For example, if a higher-rate taxpayer personally pays £100 per month for life cover, they must first earn around £180 before tax to fund that premium. With relevant life insurance, the same level of cover could cost the business just £100, saving nearly 45 per cent when factoring in corporation tax relief and National Insurance savings.

These benefits make relevant life insurance one of the most cost-effective ways for directors and small businesses to provide life cover.

Relevant Life Insurance vs. Personal Life Insurance

While both types of insurance provide similar financial protection, there are key differences. Personal life insurance is paid for by the individual from their net income, while relevant life insurance is paid by the business. Personal cover does not qualify for corporation tax relief, but relevant life insurance often does.

Relevant life insurance must also be written into a trust to ensure that the payout goes directly to the beneficiaries. For directors or employees, the cost savings alone can make relevant life cover a far better option than a personal policy.

How to Get a Relevant Life Insurance Quote

Obtaining a relevant life insurance quote is simple and straightforward. Business owners can use online tools or speak to an independent insurance adviser to compare policies and find the right level of cover. Factors that affect the cost include age, health, level of cover, duration, smoking status, and occupation.

When requesting a quote, you’ll usually need to provide details such as the business name, employee’s role, annual remuneration, and desired cover amount. The insurer may also ask basic health questions or request a medical exam, depending on the level of cover. Once approved, the policy is set up in trust, ensuring any future payout reaches your beneficiaries efficiently.

To get started, visit My Key Man Insurance’s relevant life insurance quote page to compare tailored options.

Setting Up a Relevant Life Insurance Policy

When setting up the policy, the company is both the owner and the premium payer, while the life insured is the employee or director. The plan should always be written into a discretionary trust from the outset. This ensures that the payout goes directly to the beneficiaries without being subject to inheritance tax or delays in probate.

It’s important to work with an insurance specialist or financial adviser to ensure the trust is correctly established and that the cover aligns with your company’s financial objectives. The process is simple but must be done properly to ensure full tax efficiency and compliance with HMRC rules.

How to Choose the Right Cover Amount

Choosing the right level of cover depends on your income, family commitments, and financial responsibilities. Most insurers allow you to insure between 10 and 25 times your annual salary and dividends. It’s wise to consider outstanding debts, your mortgage balance, and the income your family would need to maintain their lifestyle if you were no longer around.

A financial adviser can help calculate the appropriate amount of cover based on your personal and business circumstances, ensuring that your loved ones are fully protected without overpaying for unnecessary coverage.

Common Myths About Relevant Life Insurance

A common misconception is that relevant life insurance is only for large companies, but in fact, it’s designed specifically for SMEs and individual directors. Another myth is that it benefits the company; in reality, the policy is for the employee’s family, not the business. Finally, when structured correctly in a trust, the payout is usually tax-free, ensuring maximum support for loved ones.

Understanding the facts behind these myths helps business owners make informed decisions about the protection they need and the financial advantages available.

Why Relevant Life Insurance Is an Essential Business Benefit

Relevant life insurance provides financial security for employees and directors while supporting a company’s reputation as a responsible employer. It’s particularly useful for SMEs that can’t justify or access group life schemes, high-earning directors who want tax-efficient protection, and employers looking to offer competitive staff benefits.

By combining protection with efficiency, it demonstrates care for employees’ wellbeing while optimising company finances. It provides peace of mind for both employers and employees, ensuring that their families are protected no matter what happens.

Find Your Relevant Life Insurance Policy Today

For business owners, relevant life insurance is one of the smartest ways to combine financial protection and tax efficiency. It provides peace of mind for employees and directors, ensures loved ones are cared for, and positions your company as a responsible employer. With competitive rates available and a simple setup, there’s never been a better time to explore your options. Compare policies today and find the right protection with a trusted provider like My Key Man Insurance.