Relevant Life Cover Guide [Updated for 2025]

Protecting your loved ones is a fundamental human instinct. For business owners and directors, this extends to ensuring financial security for their families even if the worst should happen. While personal life insurance is common, many small business leaders aren’t aware of a highly tax-efficient alternative: relevant life cover. Understanding this type of policy could save you and your business significant amounts of money while providing vital protection.

But navigating the world of insurance can be complex. Different policies suit different needs, and what works for one director might not be the best fit for another. That’s where having an independent perspective becomes invaluable. At Insurance By Heroes, founded by a former first responder and military spouse, we understand the importance of reliable protection. Our team, many with backgrounds in public service, is dedicated to helping you find the right coverage. Because we partner with dozens of leading insurance carriers, we can shop the market to find a policy tailored specifically for you, ensuring you get appropriate cover without overpaying.

What Exactly is Relevant Life Cover?

Relevant life cover is a type of death-in-service benefit, but specifically designed for individual employees, including salaried directors of limited companies. Unlike traditional group life schemes often found in larger corporations, a relevant life policy provides a single, stand-alone ‘death in service’ benefit for one person.

Essentially, the company pays the premiums for a life insurance policy on the employee or director. If that individual passes away or is diagnosed with a terminal illness (usually with a life expectancy of less than 12 months, though policy specifics vary) during the policy term, a lump sum is paid out. Crucially, this payout goes directly to the individual’s family or financial dependents, usually via a discretionary trust.

Think of it as a company-funded personal life insurance policy, but with significant tax advantages that make it particularly attractive for small and medium-sized enterprises (SMEs) and their key people.

Who is Eligible for Relevant Life Cover?

Relevant life cover is primarily designed for:

• Salaried directors of limited companies.
• Employees of a UK business (including charities and trade bodies).

However, there are some important eligibility criteria and exclusions:

• Must be an Employee: The person covered must be an employee of the business paying the premiums. This includes directors who receive a salary through PAYE.
• Employer-Employee Relationship: There must be a clear employer-employee relationship. Sole traders and equity partners in LLPs generally cannot take out relevant life cover on themselves, as they are not considered employees of their own business in the required sense.
• No Undue Shareholder Benefit: The policy should primarily benefit the employee and their dependents, not serve solely as a tax avoidance mechanism for shareholders who are not active employees. HMRC rules look closely at this.
• Age Limits: Policies typically have minimum and maximum age limits for starting cover and when cover must end (often before age 75).
• Residency: Usually requires the employee to be a UK resident.
• Business Size: While ideal for SMEs, businesses of various sizes can technically use relevant life cover, provided the structure fits. However, companies large enough for a group life scheme might find that more administratively straightforward for covering many employees.

It’s vital to ensure eligibility before proceeding, as getting it wrong can negate the tax benefits. Different insurers may also have slightly varying underwriting criteria. This is another reason why working with an independent agency like Insurance By Heroes is beneficial. We can assess your specific situation and navigate the eligibility requirements across multiple providers to find the right fit.

How Does Relevant Life Cover Work?

The mechanics are relatively straightforward, but the structure involving a trust is key:

1. Company Pays Premiums: The limited company pays the monthly or annual premiums for the policy directly to the insurance provider.
2. Policy Held in Trust: The relevant life policy must be written into a discretionary trust from the outset. This is absolutely crucial for tax efficiency. The employee (or director) is the life assured, and their family members or dependents are typically named as potential beneficiaries of the trust.
3. Claim Event: If the insured person dies or meets the terminal illness criteria during the policy term, the insurance company pays the lump sum benefit.
4. Payout via Trust: The sum assured is paid to the trustees of the discretionary trust.
5. Distribution to Beneficiaries: The trustees then distribute the funds to the nominated beneficiaries according to the terms of the trust and the wishes of the deceased (often outlined in a letter of wishes).

The Importance of the Trust

The trust arrangement is not just a formality; it’s fundamental to how relevant life cover works and why it’s tax-efficient. Placing the policy in trust means:

• Outside the Estate: The payout typically does not form part of the deceased’s estate for Inheritance Tax (IHT) purposes. This means the full lump sum can go to the family without potentially being subject to a 40% IHT charge.
• Faster Payout: Because the money doesn’t need to go through probate (the legal process of distributing an estate), the trustees can often access and distribute the funds much quicker, providing financial support when it’s needed most.
• Control and Flexibility: A discretionary trust gives the trustees flexibility in distributing the funds based on the beneficiaries’ circumstances at the time, guided by the deceased’s wishes.

Setting up the trust correctly is vital. Insurance providers usually supply standard trust documentation, but understanding its implications is important. Our team at Insurance By Heroes can help guide you through this process, ensuring it aligns with your intentions.

Key Benefits of Relevant Life Cover

The primary appeal of relevant life cover lies in its significant tax advantages compared to personal life insurance paid from post-tax income, or even compared to a salary increase to cover personal premiums.

Tax Efficiency for the Business:

• Allowable Business Expense: HM Revenue & Customs (HMRC) generally considers relevant life cover premiums an allowable business expense. This means the company can typically deduct the cost of the premiums from its pre-tax profits, reducing its Corporation Tax bill. For a policy to be considered ‘wholly and exclusively’ for the purpose of trade (the test for deductibility), it must primarily be part of the employee’s remuneration package and not excessive.
• No Employer National Insurance: Unlike salary or some other benefits, the premiums paid by the company are not usually subject to Employer’s National Insurance contributions.

Tax Efficiency for the Employee/Director:

• Not a Benefit-in-Kind: The premiums paid by the company are typically not treated as a taxable benefit-in-kind for the employee or director. This means they don’t need to pay Income Tax or Employee’s National Insurance on the value of the premiums, unlike many other company-provided perks. Contrast this with paying for personal life insurance out of salary that has already been taxed (Income Tax and NI).
• Inheritance Tax Free Payout: As mentioned, because the policy is written in trust, the lump sum payout usually falls outside the deceased’s estate and is therefore not subject to Inheritance Tax.

Cost Savings Example:

Imagine a director needs £500,000 of life cover.

Scenario 1: Personal Policy

• The director needs to earn enough gross salary to cover the premium after Income Tax (e.g., 40%) and Employee NI (e.g., 2%).
• The company also pays Employer’s NI (e.g., 13.8%) on that gross salary.
• The cost to the company is significantly higher than just the premium amount due to these taxes.

Scenario 2: Relevant Life Cover

• The company pays the premium directly.
• This premium is generally Corporation Tax deductible (saving e.g., 19% or 25% depending on profit levels).
• No Income Tax or NI for the employee on the premium.
• No Employer NI for the company on the premium.

The net cost to the business for providing the same level of cover through a relevant life policy is substantially lower than funding it through increased salary for a personal policy. This makes relevant life cover a highly efficient way to provide this crucial benefit.

Other Benefits:

• Attract & Retain Talent: Offering relevant life cover can be a valuable part of an employee benefits package, particularly for high-earning directors and key staff in smaller companies where group schemes aren’t viable.
• Peace of Mind: Provides financial security for the employee’s family, knowing there’s a safety net in place.
• Simplicity for SMEs: Easier to set up and administer than a full group life scheme, especially when only covering one or a few individuals.

While the tax benefits are compelling, remember that tax rules can change, and individual circumstances vary. It’s essential the policy is set up correctly to meet HMRC requirements. This involves selecting the right provider and ensuring the trust documentation is appropriate. As an independent agency, Insurance By Heroes works with numerous carriers offering relevant life cover, allowing us to compare features and costs to find the optimal solution for your specific business needs and ensure compliance.

Relevant Life Cover vs. Group Life Insurance

While both provide death-in-service benefits, they cater to different situations:

Relevant Life Cover:

• Individual Policy: Covers one named employee or director.
• Ideal For: Small businesses, directors, high earners who might exceed group scheme limits, companies without enough employees for a group scheme.
• Tax Treatment: Premiums usually a deductible expense, not a benefit-in-kind. Payout via trust typically IHT free.
• Flexibility: Can tailor cover amount specifically for the individual.
• Administration: Simpler than setting up a full group scheme for just one or two people.

Group Life Insurance:

• Single Policy, Multiple Members: Covers a group of employees under one master policy.
• Ideal For: Medium to large companies wanting to provide a consistent benefit to many employees.
• Tax Treatment: Similar tax advantages often apply (premiums deductible, usually not a BIK, payout typically via trust).
• Flexibility: Usually based on a multiple of salary (e.g., 4x salary) for all members or classes of members. Less individual tailoring.
• Administration: Requires managing scheme membership, joiners, leavers. More complex setup but efficient for large numbers. Often requires a minimum number of members (e.g., 5 or 10).

Relevant life cover effectively fills the gap for businesses too small for a group scheme or for directors/key employees who need cover beyond what a group scheme might offer (due to ‘free cover limits’ within group schemes).

Relevant Life Cover vs. Key Person Insurance

It’s easy to confuse relevant life cover with key person insurance (also known as key man insurance), but they serve fundamentally different purposes:

Relevant Life Cover:

• Purpose: To provide a financial payout to the employee’s family/dependents upon their death or terminal illness.
• Beneficiary: The employee’s family/dependents (via the trust).
• Tax Treatment (Payout): Payout is typically tax-free for the beneficiaries (especially regarding IHT).
• Tax Treatment (Premiums): Generally tax-deductible for the company, not a benefit-in-kind for the employee.

Key Person Insurance:

• Purpose: To protect the business itself from the financial impact of losing a critical employee or director due to death or critical illness. The payout helps the business cover lost profits, recruitment costs, loan repayments, etc.
• Beneficiary: The business itself.
• Tax Treatment (Payout): The payout may be taxable for the business, depending on how the premiums were treated.
• Tax Treatment (Premiums): Tax deductibility of premiums depends on the specific purpose of the cover (e.g., covering a loan vs. loss of profits). It’s often more complex than relevant life cover premiums.

In summary, relevant life cover protects the employee’s family, while key person insurance protects the business’s bottom line. A business might need both types of cover for different individuals or even for the same individual, serving distinct needs.

Setting Up Relevant Life Cover: The Process

Setting up a relevant life policy involves several steps:

1. Determine Need & Eligibility: Confirm the individual is an eligible employee/director and establish the amount of cover needed. Consider factors like outstanding mortgages, family living expenses, and potential inheritance tax liabilities the family might face on other assets.
2. Obtain Quotes: This is where working with an independent agency like Insurance By Heroes adds significant value. We can gather quotes from multiple insurers who offer relevant life cover, comparing not just price but also policy features, definitions (especially for terminal illness), and underwriting requirements. Not all policies are created equal, and the cheapest isn’t always the best fit.
3. Application & Underwriting: The employee/director will need to complete an application form, including health and lifestyle questionnaires. Depending on the cover amount and personal history, medical underwriting (like a GP report or medical examination) may be required. Honesty and accuracy are crucial here.
4. Trust Documentation: Simultaneously, the trust needs to be set up. The insurance provider will typically provide standard discretionary trust forms. It’s important to understand who the trustees will be (often other directors, family members, or professionals) and to complete a ‘letter of wishes’ guiding the trustees on how the funds should ideally be distributed.
5. Policy Issue: Once underwriting is complete and the trust is in place, the insurer issues the policy documents to the company (as the policy owner) and confirms cover is active.
6. Premium Payment: The company starts paying the premiums as agreed (usually monthly or annually via Direct Debit).
7. Regular Reviews: It’s wise to review the cover periodically (e.g., every few years or if circumstances change significantly) to ensure it remains adequate and appropriate. Salary increases, changes in family situation, or business growth might warrant adjustments.

Why Choose an Independent Agency like Insurance By Heroes?

Navigating the insurance market, especially for specialized products like relevant life cover, can be daunting. Choosing the right policy involves more than just comparing premiums. You need to consider the insurer’s financial strength, claims history, policy definitions, and underwriting flexibility.

This is where Insurance By Heroes stands apart. Founded by individuals with backgrounds in demanding public service roles – a former first responder and a military spouse – we bring a unique perspective built on integrity, diligence, and a deep understanding of the need for reliable protection. Our team shares this ethos.

As an independent agency, we aren’t tied to any single insurance company. We work for you, our client. Our process involves:

• Understanding Your Needs: We take the time to understand your business structure, financial situation, and protection goals.
• Market Access: We leverage our relationships with dozens of top-rated insurance carriers to search the market for suitable relevant life cover options.
• Comparing Policies: We don’t just look at price. We analyze the fine print, comparing key features and benefits to ensure the policy truly meets your requirements.
• Tailored Recommendations: We provide clear, unbiased advice, explaining the pros and cons of different options, helping you make an informed decision.
• Handling the Process: We assist with the application process and guide you through setting up the crucial trust documentation.
• Ongoing Support: We’re here for the long term, available to help with reviews and any questions that arise down the line.

Just like in public service, our commitment is to serve and protect. We apply that dedication to safeguarding the financial future of our clients and their families through tailored insurance solutions like relevant life cover.

Common Questions About Relevant Life Cover (FAQs)

Can I have relevant life cover if my company already has a group life scheme?

Sometimes, yes. Relevant life cover can potentially be used to ‘top up’ cover for high earners who exceed the maximum benefit available under the main group scheme (often subject to ‘free cover limits’ which don’t require medical underwriting). It can also be used for employees who are not eligible for the group scheme for some reason. However, the rules around combining different types of death-in-service benefits can be complex, and expert advice is recommended.

What happens if the employee leaves the company?

Typically, the cover will cease when the employee leaves the company paying the premiums. Some policies may offer a ‘continuation option’ allowing the employee to take over the policy personally (without the tax benefits), but this is not standard and depends on the insurer and policy terms.

Is the cover amount limited?

Insurers will have their own maximum cover limits, often based on a multiple of the employee’s total remuneration (salary, dividends, benefits). These multiples can vary significantly between insurers and may decrease for older applicants. The aim is to provide reasonable family protection, not excessive amounts that HMRC might challenge.

Can relevant life cover include critical illness cover?

No. Relevant life cover legislation specifically relates to life cover and terminal illness cover (where life expectancy is typically less than 12 months). Adding critical illness cover would mean the policy no longer qualifies for the specific tax advantages of relevant life cover. If critical illness cover is needed, it must be arranged separately, either personally or potentially through the business (though the tax treatment would differ).

What if the company stops trading?

If the company paying the premiums ceases to exist, the policy will lapse unless arrangements are made for premiums to be continued, perhaps personally by the previously insured employee (losing the tax benefits). The specifics would depend on the policy terms and conditions.

Is the process complicated?

While the concept is straightforward, ensuring eligibility and setting up the trust correctly requires care. Using an experienced adviser, like the team at Insurance By Heroes, simplifies the process considerably. We handle the market search, comparisons, application support, and guidance on the trust documentation, making it as smooth as possible for you and your business.

Is Relevant Life Cover Right for Your Business?

Relevant life cover presents a compelling, tax-efficient way for limited companies to provide life insurance protection for their directors and employees. By potentially making premiums a tax-deductible expense for the business and avoiding benefit-in-kind charges for the employee, it offers significant cost savings compared to funding personal life insurance through salary.

The key lies in ensuring eligibility, structuring the policy correctly (especially the trust), and choosing the right provider and cover level. Every business and individual situation is unique, meaning a policy that suits one company might not be ideal for another. Insurer criteria, definitions, and pricing vary, making independent advice crucial.

At Insurance By Heroes, we understand the weight of responsibility that comes with running a business and looking after your team and family – it mirrors the dedication found in the public service backgrounds of our founders and staff. We are committed to providing clear, authoritative advice, leveraging our access to dozens of insurers to find the relevant life cover solution that best protects what matters most to you.

Don’t leave your family’s financial security to chance, or pay more tax than necessary. Explore the benefits of relevant life cover today.

Ready to see how much you could save? Take the first step towards securing tax-efficient life cover for yourself or your key employees. Fill out our simple quote form now, and let the experienced team at Insurance By Heroes compare the market and provide you with personalized, no-obligation options. We’re here to help you protect your heroes.