If you are a director considering taking out a life insurance policy, you can achieve savings of up to 50% if you set up relevant life cover via your own limited company rather than paying for the premiums out of your personal post-tax income.
In this guide, we consider 12 key facts about relevant life policies (RLPs), and how company directors can benefit.
12 key facts about relevant life insurance cover
1. How do RLPs work – in simple terms?
Relevant life policies (RLPs) provide a tax-efficient death-in-service benefit specifically for directors (and other employees) operating through limited companies. This type of policy pays out a lump sum cash payment to the director’s nominated beneficiaries in the event that the contractor dies while the policy is still active and premiums are up to date.
The payout acts as a replacement for the standard death-in-service benefit that most employees would receive if they died while working for an employer. In this way, RLPs give directors a similar safety net to provide for dependents that is available to regular employees.
2. Your limited company owns the policy, not the director
Unlike personal life insurance plans, RLPs are not taken out by the individual director themselves. Instead, the limited company set up by the director takes out the policy and owns it. The company is responsible for paying the ongoing premiums to maintain coverage.
3. Premiums can be offset against the company’s Corporation Tax bill
A key tax benefit of RLPs is that the premiums paid by the limited company are usually treated as a legitimate business expense and are therefore tax deductible against the company’s corporation tax bill. Making the premiums deductible provides tax efficiency for the director’s company. Higher rate taxpayers can save over 50% compared to paying for life insurance from post-tax personal income.
4. No benefit-in-kind issues for the director
For the director themselves, there is no benefit-in-kind tax charge for having the RLP premiums paid by their company, unlike some other benefits. The company payments do not need to be declared on the director’s P11D tax return. This avoids additional personal tax liabilities.
5. You can use multiples of salary + dividends
The potential payout from RLPs is often structured as a multiple of the contractor’s salary and dividend drawings from the company. Common multiples are up to 15 times their combined remuneration. This allows high policy limits for directors extracting profits as dividends. The multiples achievable are typically related to the age of the director.
6. No income tax or IHT issues
If the policy does pay out upon the director’s death, the lump sum received by their nominated beneficiaries is not subject to income tax or inheritance tax. This tax-free status increases the net value of the payout to dependents.
7. Relevant Life only covers death-in-service
It is important to understand that RLPs only cover death-in-service scenarios. They do not pay out in case of critical illness or incapacity where the director survives but cannot work. Separate critical illness and income protection policies should be considered by directors needing wider coverage.
8. No surrender value
If the limited company stops paying premiums and cancels the RLP cover, there is no surrender value, unlike some other insurance products. The policy only pays out if the director dies during an active policy term.
9. Limited company cannot be a beneficiary
To prevent tax avoidance, RLPs have restrictions such that the limited company cannot be a beneficiary of the policy. Only individuals like family members and charities can receive payouts. Specialist advice is recommended when setting up RLPs. You can get in touch with our IFA partner, Broadbench, via the form at the bottom of this page.
10. Policies can be standalone or part of a broader package
RLPs can be set up as standalone policies or as part of a broader employee benefits package including other insurances. This allows providers to create tailored solutions.
11. No impact on pension lifetime allowance limits
Although tax rules treat RLP payouts as business expenses, they do not reduce the lifetime allowance for pension contributions. RLPs and pensions operate independently.
12. Beware of artificially inflated policies
As with other company expenses, RLP premiums must be justifiable as wholly and exclusively for business purposes. Artificially inflated policies solely for tax avoidance may be subject to challenge by HMRC.
Find out more – and get a relevant life cover quote
For more technical details, including a tax saving example, read our guide to relevant life insurance.
To get professional advice, and a no-obligation quote, you can get in touch with our long-term partner, Broadbench, using the form below.
Hundreds of our visitors have used Broadbench for life insurance advice over the past decade. Simply fill in this form, and the team will get right back to you.
