Relevant life insurance is a tax-efficient way to provide life cover to employees. It offers numerous benefits to both your limited company and its directors.
In this guide, we answer some of the most asked questions by company directors.
Scroll down to get a quote from our long-term partner IFA.
What is relevant life insurance?
It is a death-in-service benefit that provides many benefits for employers and employees.
A relevant life policy (RLP) provides a lump sum, via a discretionary trust, to benefit employees’ dependants if an employee dies while the policy is live.
Unlike traditional life insurance, the employer (usually a limited company) pays the premiums.
What does the term ‘relevant life’ mean?
The term comes from the legal definition of a relevant policy. You can read the full text in Sections 480 to 482 Income Tax (Trading and Other Income) Act 2005 here.
To paraphrase this definition; a payment from a standard employer’s life policy is usually taxable, as it constitutes a ‘relevant benefit’ under an employer-financed retirement benefits scheme.
However, a payment is not chargeable if made from a relevant life policy.
To meet this definition, a relevant life policy must be set up in a specific way.
Can anyone take out a relevant life policy?
This type of plan is aimed at small businesses that can’t qualify for a group scheme. Most RLP providers only insure limited companies, not sole traders – unless the sole trader has employees.
Can my limited company set up a group scheme instead?
No, a group life insurance needs to cover a minimum of 5 individuals. The concept of relevant life was created in 2006 specifically to provide the benefits of group schemes to smaller companies.
How much tax will I save compared to a personal policy?
Relevant life’s tax benefits are one of its key features. The percentage of tax savings depends on various factors, including the employee’s income tax band and the company’s Corporation Tax effective rate.
High-earning company directors can save over 50% by taking out a company policy compared to paying for a personal policy out of post-tax income.
Can premiums be offset against Corporation Tax?
Yes, in most cases, HMRC treats premiums as an allowable business expense. This means they can be offset against a company’s profits for Corporation Tax purposes.
What is the Inheritance Tax (IHT) status?
The funds left to the policy beneficiaries do not form part of the employee’s estate, as the trustees, not the individual, own the plan.
Do premiums affect an employee’s pension allowances?
No, relevant life plans do not fall under pensions legislation. Policy premiums do not affect an employee’s annual or lifetime pension allowances.
Interestingly, the pension lifetime allowance will be abolished altogether in April 2024, so this question will no longer be a potential concern for high earners.
Do relevant life premiums attract a benefit in kind charge?
No. Even though the policy is taken out to ultimately benefit the individual, it benefits the business by protecting key employees. Therefore there is no benefit in kind charge or need to report the premiums on a P11D.
This means the company does not pay employers’ NICs, and the employee pays no additional income tax on the value of the benefit.
How much cover can an employee get?
The maximum amount of cover an employee can get is worked out as a multiple of total remuneration. This includes salary, dividends, benefits in kind and bonuses.
The multiples vary between insurers, but can be around 30 x remuneration for employees under 40 years old, 20 x for 40-49 year olds, and 15 x for the over 50s.
What happens if an employee leaves the company?
Most policies are completely portable, so can be transferred to a new employer. There must be no break in premiums, and the policy needs to be ported between employers to retain its relevant life status.
How much do relevant life policies cost?
Understandably, premium costs are based on risk, and subject to factors such as:
- the amount of cover required.
- the employee’s age.
- the employee’s health
- the employee’s occupation and hobbies.
- if you choose increasing or level cover.
- if you have reviewable or guaranteed premiums.
Given the number of possible factors listed above, the only way to get an accurate quote is to contact an Independent Financial Adviser (IFA). IFAs can scan the market and easily compare quotes.
Here are some examples – from a leading insurer we work with at IT Contracting.
These are the monthly premiums – paid by a limited company to insure an employee.
- 30 year old non smoker – £250k for 20 years = £10 per month.
- 30 year old smoker – £250k for 20 years = £14.52 per month.
- 50 year old non smoker – £250k for 20 years = £44.68 – per month.
- 50 year old smoker – £250k for 20 years = £117.75 – per month.
For the above examples, if you double the amount of cover, the monthly premiums will usually increase by a similar proportion.
Are there any age limits?
Policies typically cover employees from the age of 18 up to 75.
Can you provide an RLP to employees via a salary sacrifice arrangement?
Yes, this is possible. However, the premiums are no longer tax deductible if you do this. Tax efficiency is one of the key benefits of this type of insurance, so this isn’t advisable.
What happens if my company stops paying the premiums?
Unlike some other products – such as pensions, there is no surrender value if the company stops paying the premiums.
This means the policy is active as long as the premiums are paid and the insurance conditions are maintained.
There is no cash-in value if you stop paying the premiums or breach the policy terms.
Who are the trustees?
The trustees are the legal owners of the RLP. and will be in charge of the funds if a successful claim is made.
Trustees must always act in the beneficiaries’ best interests, although they have some discretion over how the funds are used.
The employer is automatically made a trustee but can opt out of this role.
You can appoint other trustees, collectively known as ‘additional trustees’. These should be people you trust, such as family members. You can also appoint a professional adviser.
Discretionary Trusts – what paperwork is involved?
It is relatively simple to set up a new RLP.
There are two key documents to complete – the Trust Deed and a Nomination Form.
The Trust Deed is the legal document that establishes the trust. It is signed by the settlor (the limited company) and the trustees, and all signatures must be witnessed.
The Nomination Form states who the beneficiaries are and the proportion of the benefit they should receive.
The employee should sign and date the Form.
What happens if the employee dies?
If the policy is still in effect, the insurance company pays the benefit to the trustees of the RLP trust.
Using their discretion, the trustees then distribute the funds to the beneficiaries named in the trust.
Does relevant life provide critical illness benefits?
No. An RLP pays out a lump sum to benefit the named employee’s dependants. It does not cover sickness, injury, or loss of employment. Speak to your IFA if you require critical illness or income protection.
What happens if the employee is alive when the policy ends?
This type of policy has no surrender value at any time. If you reach the upper limit age (typically 75), the company stops paying the premiums, and the cover ends.
Will my premiums change over the life of the policy?
This is up to you. With level cover, your payments increase over time, to account for the effects of inflation.
With decreasing cover, your premiums stay the same for the lifetime of your policy.
Premiums tend to be lower for decreasing cover arrangements than level cover.
Can life insurance be used to pay off a mortgage?
Beneficiaries can use the lump sum for any purpose, including paying off a mortgage. If you increase your mortgage borrowing at any stage, ensuring that your life cover remains sufficient to repay the loan makes sense.
When is an RLP the wrong choice?
In some specific cases, an RLP is not an appropriate choice. For example, if the person to be insured is not an employee, or if they are 75 or older.
Who are the leading insurers in the RLP market?
Some of the leading insurers include Avivia, Scottish Widows, Legal & General, Royal London and Vitality.
AEGON
- Well-established, international life insurance, pensions, and asset management company.
- Offers Relevant Life Cover with a maximum term of 40 years and a maximum age at entry of 74.
- Offers a guaranteed insurability option, which allows the policyholder to increase their cover without further underwriting in certain circumstances
- Aegon Life’s claim settlement ratio was 99.37% in 2022/23 (source).
AIG
- USA-based insurer, a.k.a. American International Group.
- Offers Relevant Life Insurance with terminal illness cover included as standard.
- Guaranteed insurability option
- Maximum entry age of 73, term length of 41 years.
- Free online trust tool to help set up the policy in trust easily.
- Paid out 99% of claims in 2022.
Aviva
- The UK’s largest general insurer.
- Offers Relevant Life Insurance with terminal illness benefit and the option to add critical illness cover.
- Maximum entry age 75, maximum term 50 years.
- Guaranteed insurability option
- Over 2.2m life policies on its books.
- Paid out 99.4% of claims in 2022 (source).
Legal & General
- Founded in the 1830s.
- UK’s leading life insurer.
- Provides Relevant Life Cover with a maximum term of 50 years and a maximum age at entry of 75.
- 2m customers with active life policies in 2020.
- Paid out just under 96.7% of claims in 2022 (source).
Liverpool Victoria (LV)
- Founded in the 1840s.
- Offers Relevant Life Cover with a maximum term of 40 years and a maximum age at entry of 74.
- Paid out ‘almost 95%’ of claims in 2022 (source).
Royal London
- Founded in the 1860s.
- Royal London is the UK’s largest mutual insurance company.
- Provides Relevant Life Cover with a maximum term of 40 years and a maximum age at entry of 70.
- A useful relevant life calculator
- Paid out 99.4% of claims in 2022 (source).
Scottish Widows
- Known for its famous TV ads.
- Edinburgh-based pension and insurance provider.
- Founded in 1815.
- Now a subsidiary of Lloyds Banking Group.
- Provides Relevant Life Cover has a maximum term of 40 years and a maximum age at entry of 73.
- Free online Trust tool to help set up the policy in trust easily.
- Offers a guaranteed insurability option.
- Scottish Widows paid out 99% of claims in 2021 (source).
Vitality
- A relatively new entrant to the industry – founded in 2007.
- The company provides a unique approach to life insurance by rewarding policyholders for living a healthy lifestyle. – Vitality Optimiser.
- Life insurance specialist with over 1m customers.
- Offers term life insurance, whole of life insurance, and serious illness cover.
- Paid out 99.7% of claims in 2022 (source).
Zurich
- Switzerland-based global insurer.
- Provides Relevant Life Insurance with a maximum term of 40 years and a maximum age at entry of 73.
- Offers general insurability option.
- Offers a wide range of other insurance products.
- Paid out almost 99% of claims in 2020 (source).
Speak to an independent financial adviser who can compare policies between these providers based on your specific needs.
Find out more about life insurance for directors
Complete this short form for a rapid response from contractor specialists, Broadbench, our long-term partner IFA.
Excellent customer service is at the heart of everything they do. Hundreds of our visitors have taken out life cover via Broadbench.