Relevant Life Policies for Company Directors Explained

A relevant life policy is a single-life term assurance policy taken out by an employer on the life of an employee. It pays a lump sum if the employee dies within the term, and the money normally goes to a trust for the employee's family. In effect, it gives one person the kind of cover a death-in-service scheme would provide, without the employer needing a group scheme.

It is a different product from key person insurance. Key person cover protects the company against the financial effect of losing an important employee and pays out to the business. A relevant life policy is there for the employee's family.

HMRC's Employment Income Manual sets out the conditions for this type of policy. In summary, the policy pays a capital sum only on the death of the insured person before an age no later than 75, it has no surrender value, its beneficiaries are limited to individuals and charities, and tax avoidance is not one of its main purposes. A policy that falls outside those conditions does not receive the tax treatment described in this article, which is why the policy wording and the trust are drafted to match them.

For the employee, HMRC's guidance indicates that premiums paid by an employer to provide this kind of death benefit are not normally charged to tax as a benefit in kind, although HMRC notes that the exemption depends on the circumstances. The contrast is with a personal policy, which is paid for from income that has already been taxed.

For the company, the deduction for the premiums is decided under the general rule that an expense must be incurred wholly and exclusively for the purposes of the trade. HMRC does not publish guidance guaranteeing a deduction for relevant life premiums, and its general approach to directors' remuneration looks at whether the overall package is reasonable. The treatment in a particular company is a matter for its accountant and, ultimately, HMRC. Our article on salary and dividends for company directors explains how the other parts of a director's pay are taxed.

The policy is normally written into a discretionary trust, so the proceeds pass to the family through the trustees rather than to the company. HMRC's Inheritance Tax Manual treats trusts of this type as relevant property trusts, but notes that the charges on them are usually nil in practice, because the trust normally has little or no value until a claim arises. Our article on discretionary trusts explains how these trusts work.

A relevant life policy is not a registered pension scheme, so the cover is arranged outside the director's pension. That separation has become more relevant because, from 6 April 2027, most unused pension funds and pension death benefits will form part of a person's estate for inheritance tax, as our article on pensions and inheritance tax from 2027 explains.

The arrangement relies on an employer paying for cover on an employee, so it is used by limited companies for their directors and staff. Sole traders and partners in a traditional partnership are not employees of their own business, so the structure does not generally work for them, and personal cover is the usual form of life insurance in those cases. MoneyHelper's guide to life insurance describes the main types of personal cover.

Relevant life cover sits between personal life insurance and a group death-in-service scheme. Compared with personal cover, the cost is met by the company rather than from taxed income. Compared with a group scheme, it covers one person and is underwritten individually. Limitations include the fact that the cover ends if the employee leaves unless the policy terms allow it to be transferred to a new employer, and that the company has to be able to sustain the premiums.

Protection needs vary widely, and directors commonly arrange this type of cover through a regulated adviser who can underwrite the policy and set up the trust.