Relevant life cover: why your company should pay for it

Relevant life cover is a life insurance policy that your company takes out and pays for on your behalf as a director or employee, rather than you buying personal life insurance out of your own income after tax and National Insurance have already been taken off it. Premiums are usually treated as an allowable business expense, and the cover typically isn't treated as a taxable benefit in kind for you personally. Tax treatment depends on your individual circumstances and may change in the future. For many company directors, that combination makes it a genuinely more efficient way to get the same life cover in place.

It works like ordinary term life insurance in most respects — set up for a chosen term, paying out a lump sum to your family if you die during that term, and stopping if you outlive the term with nothing owed either way. Being written in trust as standard normally keeps the payout outside your estate for inheritance tax purposes and lets it reach your family quickly, without waiting for probate. Tax treatment depends on your individual circumstances and may change in the future.

Why it's often cheaper to have the company pay

If you paid for personal life insurance yourself, you'd be paying the premium out of income that's already had Income Tax and National Insurance deducted from it. If your company pays for relevant life cover instead, the premium is typically an allowable expense for the business and isn't treated the same way as personal income for you. That's the core reason relevant life cover tends to work out more efficient than the equivalent personal policy for the same level of cover — you're paying for it with less tax drag along the way. Tax treatment depends on your individual circumstances and may change in the future.

Who it's actually for

Relevant life cover is designed for individual employees and directors. It's a benefit the company provides to one named person, not cover for the business itself. It suits:

• Company directors who want personal life cover but not through their own taxed income
• Small companies that don't have enough employees to run a group life scheme, since relevant life plans work even for a single director
• Anyone currently paying for personal life insurance who hasn't checked whether it could be restructured through the company instead

Who isn't eligible

Relevant life cover is only available to employees and directors who receive employment income through PAYE. If you're a sole trader, or a partner in a traditional partnership without payroll income, you generally can't use a relevant life plan, because there's no employer relationship for the cover to sit under. In those cases, personal life insurance, or a policy structured differently through a limited company if you have one, is usually the route instead.

How it's different from key person cover and shareholder protection

These three types of business-related cover get mixed up often, and they genuinely do different jobs:

• Relevant life cover pays out to your family if you die. It's a personal death benefit that the company happens to fund, similar in spirit to a death-in-service benefit.
• Key person cover pays the business, not your family, if someone critical to the company, often a director or a top performer, dies or is diagnosed with a serious illness. It protects the company's profit and continuity, not your dependants.
• Shareholder protection funds the other owners buying a deceased shareholder's stake in the business from their family, so ownership and control stay with the people running the company.

You might need one of these, two of them, or all three, depending on how your business is structured and who depends on what.

What it doesn't cover

Relevant life cover is life insurance, not critical illness cover. It pays out on death within the term, not on a serious diagnosis. If you also want cover for surviving a serious illness, that's a separate conversation, and critical illness cover works differently, including how and when it pays out.

If you leave the company

Because relevant life cover is arranged by your employer specifically for you, it doesn't automatically travel with you if you leave or the company stops trading. Some policies can be assigned to you personally in certain circumstances, but that isn't guaranteed and depends on the insurer and how the policy was originally set up. It's worth knowing this going in, rather than assuming the cover is portable in the way a personal policy would be.

Setting it up properly

Getting a relevant life plan right means the trust is written correctly, the term and cover level make sense for your circumstances — the same sizing principles apply whether you or your company is paying for it — and your accountant is comfortable with how it sits alongside your other company benefits. I'll help you and your accountant, if you have one, get all of that lined up. Have a look at business protection to see how relevant life cover fits alongside key person and shareholder cover, what drives the cost of each, or get in touch below and we'll talk through what your company actually needs.