What Is a Relevant Life Policy And Should You Have One?

Offering your employees protection through the darkest of times, for example in the event of a terminal illness diagnosis or at the time of their passing, can help solidify your standing as a reputable employer. You can keep the interests of your employees at heart and offer an attractive benefits package through relevant life insurance.

What is a relevant life insurance policy?

Relevant life policies explained in their simplest form are policies businesses acquire to provide life insurance to individual employees, usually directors or business owners.

This death-in-service benefit provides a tax-free lump sum to the beneficiaries upon death or the diagnosis of a terminal illness.

It’s particularly appealing to high earning employees that are nearing maximum allowances or small to medium-sized businesses that are not large enough to qualify for group schemes.

How does a relevant life policy work?

An employer will apply for a relevant life policy on behalf of employees and proceed to cover all associated expenses, such as monthly premiums. This insurance is written into a trust and pays out to the designated beneficiaries if the employee is diagnosed with a terminal illness or passes away during the policy term. 

If the employee chooses to leave or change employment, the policy offers continuation with your new employer, which is an added bonus.

Unlike many group schemes, the relevant life policy tax deductible nature makes it incredibly appealing for employers. The premiums associated with this insurance model can be classified as business expenses and the benefits received by beneficiaries are typically free from Inheritance Tax. 

The relevant life policy rules state: 

• It must be a single life policy.  
• There must be an employer/employee relationship present.  
• The employee must be the individual covered. 
• The employer is in charge of paying the premiums. 
• The benefits package ends once the employee turns 75. 
• The relevant life insurance policy must be written into a trust. 
• The person covered must be a UK resident or employed by a UK-resident business. 

Who benefits from a relevant life policy?

The relevant life policy can benefit several parties involved. More specifically, it helps SMEs that may be too small to qualify for a group scheme.

Instead of making employees take out their own policies and pay for them out of their own pocket, employers can provide an attractive benefit.  

Similarly, relevant life policies can help high earners, such as company directors, benefit from more coverage without affecting their annual or lifetime pension allowances.

These employees won’t need to pay for coverage out of their post-tax income, which can result in massive savings in comparison to purchasing personal life insurance policies.  

Overall, the relevant life policy tax relief makes this insurance an appealing option for both employers and employees:

• For employers, the advantage is the relevant life policy tax deductible aspect.
• For employees, the plus is that the lump sum beneficiaries receive is free from relevant life policy taxation.

Relevant life policies for company directors

More often than not, relevant life assurance policies are taken out on behalf of high earning employees, such as company directors. Since the employer is paying for the premiums, high earners won’t have to worry about any tax implications.

Similarly, the benefits paid out on behalf of the relevant life policy critical illness and death-in-service plan do not form part of the employee’s pension plan. 

At this level of employment, company directors typically pay themselves a low salary with higher dividends.

Thanks to the relevant life policy, directors can cover their total annual remuneration up to 30x, which includes both PAYE and dividends. When compared to personal life insurance policies, this can result in a significant amount of cost savings. 

Relevant life policy for self employed

If you are self employed, you can still use relevant life policy critical illness or death in service coverage to protect your employees. However, if you are a business owner classed as a ‘non-employee’, you won’t be able to provide yourself with the same level of coverage.

For a relevant life policy to be successful, there must be an employer/employee relationship present.

For example, sole traders that hire salaried directors may apply for this insurance product on behalf of their employees. However, sole traders with no employees are unable to benefit from this insurance model.

Instead, they will need to seek out another type of financial protection, such as life insurance and income protection insurance. 

FAQs

Are relevant life cover payouts taxable?

No, neither the company nor the employee is expected to pay tax contributions on the premiums whilst the proceeds are also free of Income Tax, Capital Gains Tax, and National Insurance. 

Who can take out a relevant life policy?

More often than not, relevant life assurance policies are taken out for company directors. However, any employee of a limited company, charity, partnership, or sole trader can acquire one. 

Who owns a relevant life policy?

This type of life insurance is typically set up as a relevant life policy trust and, therefore, is owned by the trustees. However, the proceeds go towards the potential beneficiaries.

Is a relevant life policy a benefit in kind?

No, relevant life policies are not classed as P11D benefits by the HMRC and, therefore, the coverage received is tax deductible.

Can a sole director/trader take out a relevant life policy?

Sole directors and traders may only take out a relevant life policy on behalf of an employee.

How many employees does a relevant life policy cover?

The relevant life policy is designed to be flexible, so you can cover as many employees as you would like.

Final thoughts

As an employer, you’re responsible for the people in your team. This involves creating a layer of security and offering financial protection through an enticing benefits package.

If you value the members of your staff, you want them to have peace of mind, even in the most unfortunate of circumstances. If an employee were to unexpectedly pass or suffer a terminal illness diagnosis, you should be able to support them financially.