Relevant Life Cover Explained

Relevant life cover is an attractive and cost-efficient benefit for employers to offer to their employees. When pension legislation changes took place in 2006, this led to the creation of relevant life cover, but what does this type of insurance offer? Here, we take a look at relevant life cover explained, and the different requirements which need to be met in order to offer the cover. 

Highlights:

• Relevant life cover is, on average, 56% cheaper than personal cover due to the tax savings that can be made.
• Relevant life cover is a company director’s most tax-efficient life insurance.
• Claim the cost of premiums as a business expense and get corporation tax relief.
• No benefit-in-kind tax to pay.
• The benefit is paid to your family, tax-free.

Relevant life cover is one of the most tax-efficient policies available to business owners and employees. Not only can the business claim corporation tax relief on the premiums paid, but there is also no benefit in kind to pay, and the benefit is also tax-free to your family.

Relevant life insurance is available from all the UK’s leading insurers, such as L&G, Zurich, Aviva, Vitality, and others. It is nothing new. It has been around since 2006 and is one of the best-kept secrets in financial services, as many advisers and accountants fail to mention it to their clients.

Relevant life cover is the same as any other personal life insurance policy in that should you die, a lump sum of money is paid to your family tax-free. The main difference is that with relevant life cover, the company pays the premiums and claims tax relief versus a personal policy paid from net income, and no income tax relief is claimed.

This alone can result in savings of over 56% over the life of the relevant life policy, and tens of thousands of pounds in savings over the contract term.

Why Was Relevant Life Cover Introduced?

Larger companies often offer employees a ‘death in service’ benefit. This is simply a life insurance contract that guarantees that if employees die while employed by the company, their family receives a lump sum payment tax-free. Larger companies have always claimed this as an expense, and HMRC does not charge any benefit in kind on the premiums.

In the early 2000s, the number of SMEs sharply increased, and many people set up smaller companies. To allow these smaller companies to offer the same kind of benefit to their employees and even directors, HMRC approved a new type of life insurance called relevant life insurance, which was introduced in 2006.

This levelled the tax benefits afforded to larger companies with smaller ones, meaning that employees of smaller companies could now access this great benefit in the same tax-efficient way. 

Who Uses Relevant Life Cover?

Company directors are the biggest customers for relevant life cover, mainly due to their tax efficiency. Life insurance is an essential part of a wider financial plan, and company owners love the fact that it reduces corporation tax, especially with the recent tax increase in 2024.

We often find that company owners take out relevant life cover with the assumption that it would cover any debts or loans and leave some legacy money behind for their families. It is up to the family what they use the funds for, but having them available provides an extra level of security.

How Much Is The Right Level Of Cover For Relevant Life?

There are many different ways to calculate this, and it really does depend on the outcome you wish to achieve. For example, a good starting point with relevant life cover is a 10x salary. This would provide ten years of income for your family, allowing them to make some lifestyle changes.

It may also be worth considering a 10x salary plus an outstanding mortgage. This level of relevant life cover would provide a mortgage-free home and ten years of income to make lifestyle adjustments.

At the opposite end of the spectrum, cover with 20 x salary would provide a lump sum that could be invested with a target rate of return of 5% per annum. This would then permanently replace the deceased’s lost salary, and the family could live off the interest.

You could also consider adding the outstanding mortgage debt as well, so a 20x plus mortgage would leave them in a fantastic position with the house paid for and the same income coming in each year for life, subject to investment performance.

Ultimately, this all comes down to affordability and the budget you have available. It is possible to leave a legacy that will ensure your family continues to live the life you are providing now, should you wish to.

Why Is The Benefit Paid Tax-Free?

As with most personal life insurance policies, the benefit of a relevant life policy  is paid into a trust. This means it does not form part of the deceased’s estate and can be left tax-free to the beneficiaries.

Upon death, the deceased’s family would notify the insurer, who would activate the policy. The benefit would be paid into a trust and the family could transfer the funds to any bank account they choose and would have complete control.

At no point will the company pay the funds to any of its other directors who are not listed as beneficiaries.

Don’t Delay Getting Relevant Life Cover

We speak to many clients who think they are too young for life insurance and presume that they can get things such as relevant life cover in the future. Hopefully, that is the case, but if anything changes regarding your health between now and then, you might find yourself uninsurable in the future. 

For example, weight and BMI are indicators of premium cost. If you are young and healthy now, having insurance in place will allow you to put on weight in later life when things get busy and still have a good value policy. If you try to find insurance with a high BMI, premiums can be loaded, meaning they are more expensive.

Should you be unlucky enough to become ill, this will appear on your medical records and may even lead to insurers declining cover. The younger and healthier you are when you take out relevant life cover, the cheaper the premiums will be. So, it is always advisable to lock them in while you can. 

How Does Relevant Life Tax Relief Work?

The costs of the premiums are added to your P&L and reduce the business’s profits, as the premiums are a qualifying expense. This means that no corporation tax will be paid on the value of the premiums.

As the premiums are paid from your business account, there is also no income tax to pay, and as a result, no national insurance to pay either.

Lastly, there is no benefit in kind to pay as HMRC has approved relevant life insurance as a qualifying business expense.

Please note that only relevant life insurance is treated this way. A personal life policy paid for by the business will not qualify. 

Relevant Life Application Process

One of the great things about using a broker like Executive Life is that we handle the entire application process for you. The application can be done over the phone, and we help with other things the insurer might need, such as GP reports or medicals.

Typically, the process can take 8 weeks if GP reports are required. However, during that time, we can offer you temporary cover that provides some insurance until the process is complete, subject to the insurer you choose to use.

Is Relevant Life Cover Transferable?

The end plan for many entrepreneurs is to sell the business and retire eventually. So, in this event, what happens to your relevant life cover? The great news is that it can be transferred to a new limited company or converted into a personal policy.

This is very important as finding a new policy in later life might be difficult if you have had any medical issues or health scares. The fact that you are now older than when you first took out the policy means that premiums are much more expensive.

This is why we recommend that company directors take out relevant life cover, even if the company has a death-in-service group policy. Group policies cannot be transferred if the company is sold, and the cover will cease, whereas a relevant life policy can move with you, which can be very cost-effective in the future.

Can My Spouse Benefit From Relevant Life Cover?

Relevant life cover is a type of death-in-service benefit, and the life insured must be an employee of the business. Therefore, if your spouse takes any salary from the company, no matter how small, they are an employee and eligible for relevant life cover.

We find it very common now for clients to pay their spouse a small monthly salary of £1,000 to use that spouse’s tax-free allowance. This would make them employees and make them eligible. 

Can I Offer Relevant Life Cover For Employees?

Yes. Relevant life cover was designed for this purpose. It can be used by any business employee, including directors. The same tax treatment applies. The business can claim corporation tax relief on the premiums, and the insured employee pays no benefit in kind tax.

Relevant life cover can be a great incentive to keep key members of staff in the business and show them that you value them and, ultimately, their families.

What’s The Oldest Age I Can Have Relevant Life Cover Until?

Relevant life insurance is available to a maximum age of 75. At this point, the cover ceases. If you are looking for coverage that lasts past this age, then you would need to consider a personal term assurance policy or even a whole life insurance policy that survives as long as you do. 

Can I Take Out Critical Illness Cover With Relevant Life?

No. Critical illness cannot be added to relevant life as relevant life insurance is a death-in-service benefit. It does, however, offer terminal illness cover.

If you are diagnosed with a terminal illness and have less than 12 months to live, the policy will pay out in advance of death. This is not to be confused with critical illness which would pay out for a much wider list of events.

The purpose of critical illness is usually to pay a lump sum if you can’t work due to sickness. A good alternative would be executive income protection. 

The business can pay for executive income protection and has the same tax advantages as a relevant life. Rather than pay a lump sum if you cannot work, it pays a monthly income that replaces 80% of your income until you return to work.

To find out more, take a look at our executive income protection cover. 

Can I Use Relevant Life Cover As Key Person Cover?

The short answer is no. Relevant life cover is designed to benefit your family in the event of death, but it can’t be paid back to the business. This is a separate policy called key person cover. We have some great options for key person cover and even another kind of policy called shareholder protection.

Are Relevant Life Insurance Premiums More Expensive Because Of The Tax Efficiency? 

No. Insurers calculate premiums based on risk, so a quote for a personal and relevant life policy will be identical, and you won’t be penalised for using the more tax-efficient option.

How Easy Is It To Cancel Relevant Life Insurance?

To cancel a relevant life policy, all you need to do is contact the insurer and tell them to cancel the policy. They will do this on the same day, and no further payments will be required. There is no exit penalty and no minimum tie-in period. 

Does Relevant Life Cover Offer Increasing or Level Benefit?

You can choose increasing or level terms when taking out a relevant life insurance cover. Various index increases can be set against such as CPI, RPI or a fixed percentage. Be aware though, that premiums can increase by more than indexation, it is just the benefit that is index-linked, the renewed premium for the additional cover is at the insurer’s discretion.

You can opt out of indexation if the premium increase is more than you can afford or wish to pay.

Does Relevant Life Cover Offer Guaranteed Or Reviewable Premiums?

Again, this is optional. Guaranteed premiums mean that initially, premiums may be slightly higher, but over the long term, they usually work out cheaper.

Reviewable premiums work in reverse. They are initially cheaper but get more expensive at each review period, which is typically every five years. The insurer will assess how the industry has changed and potentially increase the risk patterns that have been identified to calculate the premiums.

This can be a risk because if you are unhappy with the premiums, it might not be possible to find coverage elsewhere if you have had any medical issues during the insured period that a new insurer would not cover if you tried to find a better deal.

Are There Any Exclusions With  Relevant Life Cover?

You must have a UK-registered limited company and be a UK resident to qualify for relevant life cover. 

You will also need to disclose all previous medical history to the insurer, and it is common for them to request a GP report. However, this isn’t the sole characteristic of relevant life insurance, as it is the same for every life insurance policy.