Director and Employees of Small Business with Relevant Life Insurance

Relevant Life Insurance

Tax efficient life cover for directors, contractors and small businesses.

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What is Relevant Life Insurance?

A relevant life insurance policy provides a death-in-service benefit to an employee’s family, paid for by the business. This type of policy is particularly popular with small UK businesses since these policies are designed to optimise HMRC-approved tax efficiencies.

Relevant life policies can therefore often prove to be a cost-effective method of obtaining life insurance when compared to a policy paid for directly by the employee themselves.

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How does a Relevant Life Policy work?

Policyholder: With a relevant life plan, it is the business/employer that is the policyholder and pays the insurance premiums, which are typically tax-deductible as a business expense.

Life Covered: The life covered is that of the employee, which can include salaried directors (they must be on payroll). Provided the premiums are fully funded by the employer and the policy is implemented correctly, relevant life cover is not generally not classified as a P11D benefit in kind. Therefore cover does not contribute towards the employee’s overall taxable remuneration.

Beneficiaries: In the event that the insured individual dies, or, depending on the specific policy’s terms, is diagnosed with a terminal illness, the policy will make a lump sum payment. This lump sum is paid into a discretionary trust for the beneficiaries who are chosen by the employee and is not subject to inheritance tax. Beneficiaries can not be the business itself or other shareholders unless those shareholders are the spouse or children of the life covered.

Life Insurance for Directors & Contractors

Because a relevant life policy can be paid for by the company and considered as a tax-deductible business expense, it can be a cost-effective way for directors and contractors with their own limited companies to obtain life insurance.

Indeed, those who already have a life insurance policy, which they are paying for from their personal, post-tax earnings, may find that a relevant life policy can demonstrate significant savings.

Tax Efficiencies

To illustrate the potential tax efficiencies, let’s compare the two options using the following scenario.

A director and owner of a small business remunerates themselves with a base salary of £50,000 and a further £30,000 in dividends. Their business pays the small profits rate of corporation tax at 19%.

Director’s Earnings Value
Gross Remuneration £80,000.00
Total Personal Tax Liability £20,436.65
Net Income £59,563.35
Company Remuneration Costs Value
Gross Remuneration £80,000.00
Employer’s NI Contribution £5,644.20
Corporation Tax* £7,037.04
Total £92,681.24

For the director to net £59,563.35 in the 2024/2025 tax year the total cost to the company of this remuneration is £92,681.24

*To allow for a dividend payment of £30,000 the company must show a pre-tax profit of £37,037.04 with £7,037.04 paid in corporation tax.

Comparison

To keep things simple, let’s imagine the annual premium for this individual’s life insurance is exactly 1% of the net income (£595.63).

With a personal life insurance policy, the director pays this from their net income. However, for the purpose of this comparison, effectively that 1% of the director’s net income requires 1% of the total remuneration cost to pay for the policy. This is £926.81.

Instead, with a relevant life plan, the business pays the annual premium. As a tax-deductible expense, this means that instead of £595.63, the actual “Remuneration Cost” to the company is just £482.46 (since the expense reduces the company’s corporation tax bill by £113.17).

Additionally, since relevant life is not considered a benefit in kind, the director does not pay an income tax or NI on the value of the policy.

 

Policy Type “Remuneration Cost”
Life Insurance £926.81
Relevant Life £482.46

Get a Relevant Life Quote

Businesses can obtain quotes either directly from insurers themselves or through an FCA approved insurance broker such as Black Lion Insurance.

One of the advantages of using a broker with a thorough understanding of relevant life policies is that they will be able to provide advice on what policies are most likely to be suitable for your needs. However, an insurer is unlikely to be able to provide advice or even comment on policies from other insurers.

In addition to the additional service, obtaining a policy through Black Lion Insurance adds an additional layer of protection since the policy will have been recommended to you on an advised basis.

To explore your options and receive tailored advice, contact Black Lion Insurance today. Our qualified consultants are ready to help you find the solution for your business.

Facts to Consider

Amount of cover: The amount of cover required should ideally be determined by the individual’s needs. It is often a multiple of the annual base salary. Depending on the insurer and the policy, the maximum cover available is not usually more than 25 times the employee’s base salary.

Exclusions: Many insurers may not offer coverage to those in certain high-risk professions or those with certain pre-existing health conditions. Black Lion Insurance will endeavour to understand a clients needs to ensure only suitable policies are shortlisted and that the scope of any exclusions are correctly highlighted.

Application Process: It is important for businesses to provide accurate information to ensure the policy is correctly underwritten. Having received a quote the application process may require that the life covered (the director, contractor or employee) have certain health checks during the underwriting process.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute tax, legal, or financial advice. Black Lion Insurance recommends that individuals seek independent advice from a qualified professional regarding any specific financial or tax-related issues. Tax rules and regulations are subject to change, and the information provided may not reflect the most current legislation. For the latest information, please refer to the HMRC website.

FAQs

What’s the difference between relevant life insurance and keyman insurance?

Keyman insurance is designed to protect a business from financial loss if a significant member of staff passes away. A payment is made to the business in order to assist with the ongoing operations of the business. Relevant life insurance provides financial support to the family of an employee that has died, with no money going to the business.

Can a Relevant Life policy include cover for critical illneses?
No. The a relevant life policy can only pay out on death or diagnosis of a terminal illness.
How is Relevant Life different to Group Life Insurance?
Group Life policies provide standardised life cover to all the members of a scheme. This generally means that each employee on the policy receives a death in service benefit, for example, 3x annual salary. Group Life Insurance policies usually can not be set up to cover just 1 or 2 lives.
Can Sole Traders or Equity Partners get a Relevant Life Plan?
No. Relevant life policies are designed for Limited companies and Limited Liability Partnerships. Unfortunately a relevant life policy can not be set up for a sole traders, partnerships or equity partners.

About Us

Part of Halo Consulting, Black Lion Insurance are a dedicated team of insurance consultants with years of experience in guiding our clients to a solution that meets their specific needs. We specialise in helping both employed and self employed individuals, as well as business owners on a variety of solutions, which range from income protection, keyman and shareholder protection insurance.