Relevant Life Insurance: The Tax-Efficient Cover Most Directors Have Never Heard Of

The cover you're probably paying for the wrong way

If you're a director with a personal life insurance policy, there's a reasonable chance you're funding it in the least efficient way available to you. Premiums are paid from income that's already been through personal tax and, for a higher-rate taxpayer, through the extra erosion of National Insurance if the money came out as salary or dividends first. You've effectively paid tax twice to buy cover that a limited number of structural changes could have made considerably cheaper to provide. This isn't a product most advisers lead with, because it doesn't suit everyone and it has no relevance to an employee on PAYE with no company behind them. But for a director of their own business, or a senior employee whose employer will cooperate, it's worth understanding properly rather than defaulting to a personal policy because that's what you set up fifteen years ago and never reviewed.

Why personal life cover is inefficient for a director

When you pay for life insurance personally, the premium comes from money that has already borne income tax, and possibly dividend tax, on the way to your bank account. If you're a higher or additional-rate taxpayer, that's a meaningful chunk of the premium lost before the policy even starts. There's no corporation tax relief for your business either way, because the premium was never a business expense — it was your personal spending. Contrast that with a policy the company pays for directly as a business expense, structured correctly, and the economics shift substantially in your favour. The company gets to treat the premium as an allowable expense in most cases, reducing the profit it pays corporation tax on. You, as the director, don't pay income tax or National Insurance on the premium because it isn't treated as a benefit in kind when the policy is set up correctly. The net effect is the same level of cover, funded through pre-tax company money instead of post-tax personal money.

How relevant life insurance actually works

A relevant life policy is a term life insurance policy, written on your life, but owned and paid for by your company rather than by you. It pays out a tax-free lump sum to your family if you die during the term — the same outcome as a personal policy. The difference is entirely in how it's structured and funded. The policy sits in trust from the outset, which means the payout goes directly to your beneficiaries without going through probate and, in most cases, without being counted as part of your estate for inheritance tax purposes. That's a second advantage on top of the premium efficiency: a lump sum that reaches your family quickly and sits outside the inheritance tax calculation entirely, rather than adding to an estate that may already have an exposure problem if you've been building wealth inside the business and extracting it steadily. It also sidesteps the issue that many directors hit with group life schemes once their income is well into six figures — a relevant life policy isn't tested against the same scheme-wide limits that can cap how much cover a company death-in-service benefit will provide for its higher earners.

Who this suits — and who it doesn't

• You're a director or senior employee of a limited company that can afford to pay the premium as a business expense

• You currently hold, or are considering, personal life cover funded from taxed income

• Your company doesn't offer a group life scheme, or offers one that caps cover below what you'd actually want for your income level

• You want the payout to sit outside your estate rather than adding to a potential inheritance tax exposure

• You're not a sole trader or partner in an unincorporated business — this only works through a limited company structure

• You don't already have cover you're happy with and simply haven't reviewed who's paying for it

What to check before you set one up

The tax treatment depends on the policy being structured correctly from day one — written in trust, with the right beneficiaries named, and set up in a way that keeps it outside benefit-in-kind rules. Get this wrong and you lose the efficiency that's the entire point of using this route rather than a personal policy. It's also worth checking how it interacts with anything else the company already provides — a group death-in-service scheme, for instance — so you're not duplicating cover unnecessarily or leaving a gap because each arrangement assumes the other is covering a different scenario. And because the premium is linked to your role as a director or employee, it's sensible to think through what happens to the policy if you later sell the business, change its structure, or stop drawing income through it in the way you do now. None of this is complicated once it's set up properly, but it does need setting up properly, which is where a review alongside your wider protection and estate position earns its keep.

**If you're funding life cover personally and have never had it checked against the business-funded alternative, it's worth five minutes to find out what you're leaving on the table. Request our free guide, The Pre-Retirement Pension Review, or book a no-obligation call at www.dmfinancialplanning.co.uk.**

Important information

This article is for general information only and does not constitute personal financial advice. The value of investments can fall as well as rise and you may get back less than you invest. Tax treatment depends on individual circumstances and may change. A pension is a long-term investment; funds cannot normally be accessed until age 55 (57 from 2028). DM Financial Planning is a trading style of Aegis Financial Planning Limited, authorised and regulated by the Financial Conduct Authority (FCA No. 624298).