Relevant life cover, explained

A relevant life policy is life insurance for a single employee or director that their employer pays for. If the person dies during the term, the policy pays a lump sum to their family or other chosen individuals, not to the business. In effect it is death-in-service cover for one person, set up without a group scheme.

Its appeal is the tax treatment. HMRC's guidance says payouts from a relevant life policy are not taxed under the rules for employer-financed retirement benefits schemes, and a benefit-in-kind charge on the premiums may be exempt. But those outcomes depend on the policy meeting HMRC's conditions, so the details matter.

How a relevant life policy works

The employer takes out and pays for a term life policy on the employee. The benefit is intended for the employee's dependants or other individuals, so it is not a business asset in the way key person insurance is. The two are easy to confuse:

MoneyHelper notes that employer death-in-service cover is usually linked to salary and ends if you leave the employer. A relevant life policy offers similar cover to one person, so it can be relevant if your employer has no group scheme or if you are a director of your own company.

HMRC's conditions

HMRC's Employment Income Manual (EIM15045) describes three kinds of relevant life policy. The one most people will meet is an individual policy that would count as an excepted group life policy if it covered a group. For that, the policy must:

• pay a capital sum on death before a specified age that is no later than 75
• have no surrender value, and provide only the benefits the rules permit
• pay out only to individuals or charities
• not have tax avoidance as a main purpose

HMRC also allows a policy that includes certain excluded benefits, such as ill-health benefits or benefits for death by accident during service, where it would otherwise meet those conditions.

If a policy does not meet the conditions, the tax treatment described below may not apply. It is reasonable to ask the insurer to confirm, in writing, that the policy is designed as a relevant life policy under these rules.

Tax treatment

For the employee. HMRC's guidance says the payment of premiums does not attract a charge under the employer-financed retirement benefits rules, but may be taxable under other provisions. It says a benefit-in-kind charge may be exempted by section 307 of the Income Tax (Earnings and Pensions) Act 2003, depending on the circumstances. Section 307 covers an employer's expense in providing a benefit payable on an employee's death or retirement. Where only part of the cover qualifies, HMRC says an apportionment may be made if that part can be identified.

For the payout. HMRC says a payment from a relevant life policy is excluded from the definition of a relevant benefit, so it is not taxed under the employer-financed retirement benefits provisions.

For the company. Whether the company can deduct the premiums as a business expense is a question for its accountant. We have not set out a rule here because HMRC's manuals do not give a single answer for every case.

Who it is designed for

Because it is an employer-provided benefit taxed under the employment income rules, a relevant life policy is designed for employees, including directors of a limited company who are employed by it. A sole trader or a partner is not an employee of their own business. Our guide to income protection for the self-employed covers the personal cover options when you work for yourself.

Trusts and who receives the money

Because the benefit must go to individuals or charities, check whether a trust or nomination names who should receive the money. MoneyHelper notes that a trust can set out who receives life insurance money and when, and can keep it outside your estate. Scotland has its own trust law, updated by the Trusts and Succession (Scotland) Act 2024, so if you live in Scotland, check that the trust form suits Scots law. Our guide to life insurance in trust has more.

What to check in your policy

• Confirmation that it is a relevant life policy, designed to meet HMRC's conditions.
• Expiry age: no later than 75, and whether it matches the employee's working life.
• Surrender value: there must be none.
• Beneficiaries: only individuals or charities, never the business.
• Trust or nomination: whether one is in place, who the trustees are, and whether the wording suits Scots law if you live in Scotland.
• Additional benefits: anything beyond death cover, and whether it fits the excluded benefits HMRC allows.
• What happens if employment ends: whether cover stops and any option to continue.
• Sum assured: how it was set, and whether it still reflects the employee's salary.
• Premium type: fixed or reviewable.

When to talk to a regulated adviser

A relevant life policy combines insurance, employment tax and trust law. A regulated financial adviser can recommend whether it fits, and an accountant can confirm the tax position for the company and the employee. If you live in Scotland, a Scottish solicitor can check the trust side. InsuredRight does not recommend products, but our free policy check can help you find the clauses above in an existing policy.

This guide is general information about how insurance works in the UK. It isn't advice and doesn't take your circumstances into account. Policies differ: your own policy documents are what count.