Relevant Life Insurance for Directors: What It Covers and When It May Fit
This article is for general information only and does not constitute personal financial, insurance, tax, or legal advice. Relevant life insurance is subject to the insurer's eligibility, medical and financial underwriting, policy terms, and trust arrangements. Tax treatment depends on individual and company circumstances and may change. If premiums are not maintained, cover may end, and no benefit may be payable.
For company directors, personal and business finances often overlap. If a director dies, their family may still face mortgage payments, household costs, and other commitments without the income they relied on.
Relevant life insurance allows an employer to fund individual life cover for an eligible director or employee. The arrangement must meet specific conditions, and its suitability depends on the director’s protection needs, employment status and wider finances.
What Is Relevant Life Insurance?
A relevant life policy is usually a single-life term assurance policy established and funded by an employer.
If the insured director or employee dies while the policy is in force and the claim meets its terms, a capital sum is paid for the benefit of eligible beneficiaries.
A qualifying individual policy generally needs to:
- Cover one person
- Pay a capital sum on death during the term
- End at a specified age no higher than 75
- Has no surrender value
- Restrict beneficiaries to individuals or charities
- Avoid having tax avoidance as one of its main purposes
These conditions are explained in HMRC’s guidance on relevant life policies.
The policy is often placed in a discretionary trust. The trustees deal with a valid claim according to the trust deed, while an expression of wishes can record who the insured person would like to benefit.
Trustees and beneficiaries should be reviewed after significant family or business changes.
When Might a Director Consider It?
Relevant life insurance may be worth considering when a company wants to fund individual death cover for an employed director.
It may be relevant where:
- The company is too small for a group life scheme
- A director is not included in an existing workplace arrangement
- Personal life cover no longer reflects the family’s needs
- The company wants to provide individual cover as an employee benefit
- Protection is being reviewed alongside salary, dividends, and pensions
The intended recipient is crucial. Relevant life insurance normally supports the director’s beneficiaries. Key person insurance usually pays the business, while shareholder protection supports an agreed share transfer.
How Does It Compare With Other Protection?
| Type of cover | Intended recipient | Main purpose |
|---|---|---|
| Relevant life insurance | Director’s or employee’s beneficiaries | Individual family protection |
| Personal life insurance | Chosen beneficiaries | Personally funded protection |
| Key person insurance | The business | Business continuity |
| Shareholder protection | Company or surviving owners | Funding a share transfer |
One policy should not be assumed to meet every family and business need.
Potential Tax Treatment
Relevant life insurance is often discussed in terms of tax efficiency, but no tax advantage should be treated as guaranteed.
Where the arrangement meets the relevant conditions, employer-paid premiums may be exempt from an income tax benefit-in-kind charge. The National Insurance position should also be confirmed for the particular arrangement.
HMRC states that a payment from a qualifying relevant life policy is excluded from the employer-financed retirement benefit charge. Other tax provisions may still apply.
Corporation tax relief on company-paid premiums is not automatic. The company’s accountant should decide whether the expense is allowable, taking account of the director’s role, remuneration and the commercial purpose of providing the cover.
The eventual treatment of a claim may also depend on the trust, beneficiaries, and circumstances at the time.
Important: The insurer cannot guarantee the tax treatment of a relevant life arrangement. The company’s accountant and, where necessary, a solicitor or tax specialist should review the proposed structure.
Who May Be Eligible?
A relevant life arrangement normally requires a genuine employer-employee relationship.
A director employed by their limited company may be eligible, subject to the insurer’s requirements. Being a director or shareholder does not guarantee acceptance.
A sole trader acting only in that capacity would not usually qualify because the individual and business are not separate legal persons. Other business structures should have their employment status checked.
Insurers may consider:
- Salary and wider remuneration
- Existing life cover and employee benefits
- Age, health, and lifestyle
- Occupation and business activities
- Personal and company finances
- The reason for the requested cover
The proposed benefit must usually be financially justifiable as well as affordable.
Six Checks Before Applying
1. Define the Financial Need
Consider the household’s position if the director dies, including everyday spending, borrowing, debts and the period for which dependants may need support.
Existing policies and workplace benefits should be included. Our mortgages and mortgage protection service explains how personal cover may be considered alongside borrowing and family commitments.
2. Choose a Defensible Amount
The largest amount an insurer offers is not automatically appropriate. The sum assured should reflect a clear financial need rather than simply the maximum available.
3. Set a Suitable Term
The term may relate to the expected mortgage repayment date, the period during which dependants need support, or the director’s planned retirement age.
Relevant life insurance is generally term assurance. If the insured person survives the term, the policy normally ends without a payment.
4. Test Company Affordability
Premiums need to remain affordable if trading conditions and profits change.
5. Select Trustees Carefully
Trustees have legal and administrative responsibilities. They should understand the arrangement, maintain records, and act according to the trust deed.
6. Check What Happens When Employment Ends
Continuation and transfer options vary. Directors should understand what happens if they sell or close the company, become self-employed, move employer, or stop being an employee.
Changing the policy or its ownership may affect the tax position, so advice should be taken before making changes.
Underwriting and Policy Terms
Relevant life insurance is subject to medical and financial underwriting.
Applications may ask about health, family medical history, occupation, lifestyle and finances. Incomplete or incorrect answers may affect a claim.
The insurer may charge a higher premium, apply exclusions, reduce the cover, postpone a decision or decline the application.
Price is only one consideration. A cheaper policy may provide poor value if its term, exclusions or continuation options do not meet the need. The FCA’s pure protection market study emphasises consumer understanding and fair value across protection products.
Common Mistakes
Directors should avoid:
- Confusing family protection with key person cover
- Assuming tax relief is guaranteed
- Ignoring existing policies and employee benefits
- Treating the trust as standard paperwork
- Failing to update beneficiary wishes
- Overlooking the effect of leaving the company
- Giving incomplete underwriting information
- Choosing a cover based on price alone
Additional illness, disability, or accidental death benefits may alter the tax analysis. These features need individual review.
Review Cover Alongside Other Director Decisions
Company-funded protection competes with salary, dividends, retained profits, pension contributions, and investment.
Our guide to director pension contributions covers another area where company and personal planning meet. Pensions and relevant life insurance serve different purposes, so one should not be treated as a substitute for the other.
Affordability is only one test. The policy should address a genuine protection need and remain suitable if the company or family circumstances change.
Check How the Cover Fits the Wider Plan
Relevant life insurance may provide useful family protection for an eligible director who does not have suitable cover through a group scheme. Its value depends on the amount, term, trust, beneficiaries, underwriting, and future options, not only its possible tax treatment.
Through our business planning and employee benefits service, we help directors consider business protection, pensions and employee benefits within their wider company and personal financial plans.
Visit the service page to learn more about our approach and arrange a free introductory conversation. Any recommendation would follow a review of your needs, eligibility, and individual circumstances.
Relevant life insurance normally has no cash-in value. If premiums are not maintained, cover may end. A claim will only be paid where it meets the policy terms, and exclusions may apply. Tax treatment depends on individual and company circumstances and may change.
McCarthy Wealth is a trading style of Clarity Wealth Management LLP. Clarity Wealth Management LLP is authorised and regulated by the Financial Conduct Authority (FCA). Clarity Wealth Management LLP is entered on the FCA register under Firm Reference Number 575252.
