Relevant Life Cover Explained: Life Insurance for Directors and Employees
For business owners, looking after the people who help their company succeed matters. Providing life insurance can offer valuable reassurance to employees and their families, but smaller businesses do not always need a company-wide group scheme.
Relevant Life Cover offers another option. It allows a business to arrange individual life insurance for eligible directors and employees, with premiums paid by the company. When set up correctly, it can also offer tax advantages compared with paying for personal life insurance from taxed income.
Here, we explain how Relevant Life Cover works, who it may suit and what to consider before arranging a policy.
What is Relevant Life Cover?
Relevant Life Cover is an individual life insurance policy arranged and paid for by an employer for an employee, which can include a company director.
If the person covered dies during the policy term and the claim meets the policy conditions, it pays a lump sum through a trust for the benefit of their family or other eligible beneficiaries. This money could help with mortgage payments, household bills or the longer-term financial needs of dependants.
Some policies also include terminal illness cover, subject to the insurer’s terms.
Unlike a group life insurance scheme, Relevant Life Cover is arranged separately for each person. This makes it an option for smaller businesses that want to provide death-in-service benefits without establishing a wider employee scheme.
How does Relevant Life Cover work?
Setting up a policy usually involves:
- Choosing the cover: deciding how much financial support the person’s family may need and how long the policy should run.
- Applying for insurance: the insurer assesses the application, including relevant health and lifestyle information.
- Establishing the trust: the policy is placed in a suitable trust from the outset, with trustees appointed to administer it.
- Paying the premiums: the business pays the ongoing cost of the policy.
The trust arrangements are an important part of the process. They help ensure that any payout can be managed for the intended beneficiaries, so they should be considered alongside the insurance itself.
What are the tax benefits of Relevant Life Cover?
One of the main reasons businesses consider Relevant Life Cover is its potential tax efficiency.
Where the policy and premiums meet the relevant conditions:
- Premiums may qualify as an allowable business expense, potentially reducing the company’s corporation tax bill.
- Employer-paid premiums are generally not treated as a benefit in kind for the employee.
- There is generally no employee or employer National Insurance liability on the premiums.
However, tax relief is not automatic. Premiums must meet the “wholly and exclusively” business expense test, and the treatment depends on the circumstances of the arrangement. Your accountant can help confirm how this applies to your business.
A correctly arranged trust will normally keep the payout outside the insured person’s estate for inheritance tax purposes. However, trusts can have their own tax charges in some circumstances, so it is important to avoid assuming that every payout will be entirely free of tax.
Who is Relevant Life Cover suitable for?
Relevant Life Cover may be worth considering for:
- Company directors who want their business to fund life insurance for their family’s benefit.
- Small businesses that do not have a group life insurance scheme.
- Employers looking to provide an additional benefit for selected employees.
- Higher earners whose wider pension and death-in-service arrangements need careful planning.
There must be a qualifying employer – employee relationship. Sole traders cannot generally arrange Relevant Life Cover for themselves, and equity partners and LLP members are generally ineligible in their capacity as business owners. Eligible employees of those businesses may still qualify.
Relevant Life Cover also sits outside registered pension arrangements. Premiums do not count towards the pension annual allowance, and benefits do not use the individual’s pension lump sum and death benefit allowance. This can be relevant when reviewing protection alongside substantial pension savings.
Is Relevant Life Cover the same as key person insurance?
Although both involve insurance on someone working in a business, they serve different needs.
Relevant Life Cover provides financial support for the insured person’s family or other eligible beneficiaries.
Key person insurance is designed to protect the business itself, for example against the financial impact of losing someone whose skills, relationships or experience are central to its success.
Relevant Life Cover should therefore not be treated as a replacement for key person protection. A business may need to consider both as part of its wider protection planning.
How does it compare with group life insurance?
Group life insurance covers multiple employees under a single scheme. Relevant Life Cover provides a separate policy for each insured individual.
For a small company, an individual arrangement may be a practical way to introduce life cover. For a larger team, a group scheme may be more suitable. The right approach depends on your workforce, budget and the benefits you want to offer.
As your company grows, it is worth reviewing whether your existing arrangements still meet your needs.
How much cover should you arrange?
The amount of cover should reflect the financial needs of the person being insured and their dependants, within the insurer’s limits.
Useful considerations include:
- Outstanding mortgage borrowing and other debts.
- The income their household would need to replace.
- Childcare, education and other ongoing family costs.
- Existing life insurance and death-in-service benefits.
- How long their dependants may need financial support.
For directors receiving both salary and dividends, the insurer’s approach to assessing earnings will also matter. An adviser can help establish an appropriate level of cover and explain the available options.
Speak to Cox & Co about Relevant Life Cover
Whether you are arranging life insurance for yourself as a director or exploring benefits for your employees, Cox & Co can help you understand your options.
You’ll have a dedicated point of contact to talk you through your needs, answer your questions and guide you through the process. We’ll take the time to understand your business and the people you want to protect, helping you consider whether Relevant Life Cover is right for you.
Tax treatment depends on individual circumstances and may change. Cover is subject to eligibility, underwriting and policy terms.
