Relevant life insurance

Relevant life insurance can provide financial protection for an employee by paying out a lump sum to their loved ones.

Small to medium sized businesses can use it as an alternative to death in service or group life insurance.

But how does it work and who pays for the policy? 

What is relevant life insurance?

It is a form of life insurance that’s paid for by an employer.

It acts like a form of ‘death in service’ benefit for smaller companies.

Death in service is a benefit that pays out to an employee’s family if they die while in employment.  

How does relevant life insurance work?

Businesses usually arrange and pay for relevant life insurance policies. It could be used to:

• Act as an employee benefit by providing financial protection for an employee - small to medium sized businesses might not qualify for larger death in service schemes. So, relevant life insurance can provide this benefit.
• Act as a tax-efficient way for the business owner/director to buy life insurance – premiums can be classed as a business expense, making them tax deductible. And there’s no national insurance to pay on the premiums. So, for owners and directors, this could be a cheaper way of buying life insurance.

Just like with personal life insurance, you'll decide the type of policy (like level term or increasing term life insurance), how long it lasts, and how much it'll pay out. You'll make these choices during the application process.

The policy will be set up on an individual basis to protect an employee. If the owner wishes to cover more than 1 employee, the business will need to buy multiple policies.

It will pay out to the insured employees family if they die while in employment and during the policy term.

The pay out could help their loved ones to cover living costs, pay for the funeral and keep a roof over their heads.

If the insured employee leaves the business, they'll no longer be protected. 

Who can buy relevant life insurance?

This policy isn’t available to everyone. In general, it’s a policy aimed at small to medium sized businesses.

If you want to buy a relevant life insurance policy, you must own a limited company, partnership or limited liability partnership (LLP).

As a director, you must be earning a salary if you wish to protect yourself with the policy.

Sole traders can also buy a policy but this must be to protect an employee, not for themselves. 

What are the benefits of relevant life insurance?

These are the main benefits of a relevant life insurance plan:

• Allows smaller businesses to provide death in service – as a small business you might not have been big enough, or it could have been too expensive, to take part in larger death in service/group life insurance schemes.
• Tax efficient – as the premiums are paid for by the business, they can be tax deductible.
• Happy employees – financial protection is a great benefit to offer your employees and something they’re likely to be very grateful for.
• Offers peace of mind - the employee and their family can relax knowing that they are protected should the worst happen.

How much does relevant life insurance cost?

The price of relevant life insurance varies depending on the personal circumstances of the insured employee, including:

• Their age
• Their smoking habits
• Their health and wellbeing
• Their job role
• Their lifestyle (such as hobbies and drinking habits)

Although the application takes the personal circumstances of the employee into consideration, it’s the business that pays the premiums. 

What's the difference between relevant life insurance vs life insurance?

The main difference is that relevant life insurance is bought by a business and life insurance is bought by an individual.

Both policies pay out to loved ones to help them with mortgage costs, funeral costs and other living costs. 

Cover stays in place unless you cancel the policy, stop paying premiums, die or outlive the policy

What is the tax treatment of relevant life insurance?

The premiums for a relevant life insurance policy are typically seen as a business expense, meaning they can be tax deductible. 

Is relevant life insurance a benefit in kind?

No. Although an employee is protected and their family benefits from the pay out, it's not commonly treated as a benefit in kind. 

What other business protection policies are there?

As well as relevant life insurance, you might also want to consider:

• Key person insurance – key person (or keyman) insurance helps to protect a key employee. Instead of paying out to their family, it will pay out to the business to help with the financial loss of losing them. This could be to replace lost profits, cover business loan payments or pay for the hiring and training of a new employee.
• Group life insurance – if your business expands and becomes bigger, you might be able to take part in group life insurance/death in service schemes. It provides life insurance for a group of employees and pays out a lump sum if they die.
• Shareholder protection – shareholder protection insurance allows remaining shareholders to purchase the shares of a shareholder that has recently died or become seriously ill.   

Is relevant life insurance right for your business?

If you’d like to provide your employees with death in service benefit, but you’re too small for group life insurance schemes, relevant life insurance could work for you.

Alternatively, as business owner/director it could provide you with a tax-efficient way of buying life insurance.

Before making any decisions, it’s wise to consult a financial or business advisor. You can talk through your business and what your protection needs are. The advisor should give you advice on what’s best for you and your business.