For many company directors, life insurance is something they arrange personally.

They choose the level of cover, pay the premiums from their own income and leave the policy in place to support their family if they die.

There is another option.

A limited company can take out a relevant life policy for a director or employee and pay the premiums itself.

For owner-directors in particular, that can make more sense than paying for comparable cover personally.

What is a relevant life policy?

A relevant life policy is a form of life insurance arranged and paid for by an employer for an individual employee or director.

It is designed to provide a death benefit rather than build up an investment value.

The company owns and pays for the policy, while the benefit is normally written into trust for the insured person’s beneficiaries.

HMRC recognises relevant life policies within a specific statutory framework, which is why they can receive different tax treatment from an ordinary employer-funded personal life policy. 

For small limited companies, they can be particularly useful where there is no larger group life scheme in place.

Why directors consider company-funded cover

The obvious difference is who pays the premium.

With an ordinary personal policy, the director pays from income they have already taken out of the company.

That money may already have been subject to Income Tax or dividend tax before the premium is paid.

A relevant life policy is funded directly by the business.

That can make the overall cost more efficient, provided the policy is structured correctly and the company meets the relevant tax conditions.

It also allows a small company to provide a death-in-service style benefit without needing a full group scheme.

How much cover can you get?

The amount available will depend on the insurer, the director’s age, remuneration and other underwriting factors.

Insurers will normally look at salary and may also take other earnings into account when deciding how much cover they are prepared to offer.

That matters for owner-directors because salary alone may not reflect the amount they actually take from the company.

A director considering cover can use a relevant life insurance calculator to get an initial indication of the level of cover that may be available.

The final figure will still depend on the insurer’s underwriting and policy limits.

What happens to the benefit?

Relevant life cover is normally written into trust.

That matters because the benefit is intended for the employee or director’s chosen beneficiaries rather than the company itself.

If the insured person dies during the policy term and the claim is accepted, the insurer pays the benefit to the trustees, who then distribute it in line with the trust terms.

This is one of the key differences between relevant life insurance and key person cover.

A key person insurance policy is designed to protect the business itself against the financial impact of losing an important director or employee.

Relevant life insurance is aimed at protecting the individual’s family or other beneficiaries.

A company may have a reason to arrange both, but they serve different purposes.

What about tax?

Tax treatment is one of the main reasons directors look at relevant life policies, but it needs to be handled properly.

The company may be able to treat premiums as an allowable business expense where the normal conditions are met, although the position depends on the purpose of the policy and the circumstances of the business.

The premium will not normally be treated in the same way as ordinary salary paid to the director, and a correctly structured relevant life policy can also avoid the usual benefit-in-kind treatment that might otherwise arise from employer-funded personal cover.

That does not mean every company-paid life policy automatically qualifies.

The policy must meet the relevant conditions, and the commercial purpose needs to be clear.

For that reason, it makes sense to confirm the tax treatment with an accountant or adviser rather than assuming that any life insurance premium paid by the company will receive the same treatment.

It is not the same as ordinary personal cover

Relevant life insurance tends to suit directors and employees who want substantial life cover funded by the business.

It may be particularly attractive where:

• the company has only a small number of employees 
• there is no group life scheme 
• the director wants additional cover outside an existing scheme 
• the business wants to fund protection without the director paying the premium personally 

It will not suit every situation.

A personal policy may still be more appropriate where the individual wants complete control over the arrangement, expects to change employer frequently or needs features that are not available within a relevant life structure.

The comparison should therefore be based on the actual cover required rather than tax treatment alone.

Check the structure before buying

The main questions are fairly practical.

How much cover does the director need?

How long should the policy run?

Who should receive the benefit?

And does the company-funded structure genuinely suit the way the business and the director’s remuneration are organised?

For many owner-managed companies, relevant life insurance is worth considering precisely because it allows the business to fund a benefit the director might otherwise pay for personally.

The attraction is not simply that the company writes the cheque. It is that the cover can sit neatly within the wider financial arrangements of the business when it is set up correctly.