Who is eligible for relevant life cover?
Relevant life cover is designed for people who are employees of the business paying for it. That can include a director who is employed by their own limited company. Insurers set their own age, term and cover limits, and will check that the person is genuinely employed by the policyholder.
It is typically considered by small limited companies where the directors are too few to justify a group scheme, or where an employee wants individual cover in addition to an existing group arrangement.
Why a sole trader cannot insure themselves this way
A sole trader or a partner in a traditional partnership is not employed by a separate legal entity, so there is no employer to fund the policy. They would normally look at personal life insurance instead. A sole trader who employs staff may be able to arrange relevant life cover for those employees, but not for themselves.
How employer funding works
The employer applies for and pays the premiums. The employee is the life assured. Because the employer pays, the cost is not paid from the employee’s taxed income in the way a personal policy would be. Whether that creates a tax advantage depends on the conditions explained below.
Trusts and beneficiaries
Relevant life insurance is normally placed in a trust at the outset. The trustees hold the policy and, on a valid claim, pay the proceeds to the beneficiaries the employee has nominated, such as a partner or children. Using a trust is intended to keep the money separate from the business and from the employee’s estate, subject to the trust terms and applicable law.
The employee should review their expression of wishes when family circumstances change. Trust wording and trustee choices may benefit from legal advice.
What relevant life cover typically includes
It is a term life policy that pays a lump sum if the employee dies during the term. Some policies include terminal illness benefit, paying early if a diagnosis meets the insurer’s definition, but only where the policy terms provide it.
Critical illness cover should not be assumed. It is not a standard feature of relevant life insurance and, where a separate critical illness benefit is wanted, it is usually arranged differently.
Policy limits and underwriting
Insurers apply limits based on the employee’s remuneration and age, and they underwrite the individual’s health and lifestyle in the same way as personal life cover. Cover may be offered at standard terms, with a loading, with exclusions, or declined.
Tax relief conditions
Relevant life policies are often described as tax efficient, but relief depends on the policy meeting specific legislative conditions and on the premiums being an allowable business expense for the employer. The employer’s local inspector of taxes may consider whether the expenditure is wholly and exclusively for the purposes of the trade.
Tax treatment depends on the policy structure, business purpose and individual circumstances, and may change. Tax relief is not automatic; confirm the proposed arrangement with your accountant or tax adviser.
Review when employment changes
Relevant life cover is linked to employment. If the employee leaves, the policy may end or may be transferable to a new employer, depending on the insurer’s terms. It cannot normally be converted into a personal policy paid by the individual. A change of role, salary or ownership is a good moment to review whether the cover is still appropriate.
