If you’re a business owner, director, or high-earning employee in the UK, you may be wondering about the difference between relevant life insurance and personal life insurance. While both can protect your loved ones financially, the way they’re taxed, paid for, and structured is significantly different.
In this article, we explore how both policies compare and help you decide which option is more efficient for your situation.
What is personal life insurance?
Personal life insurance is a policy that you take out as an individual. You pay the premiums from your post-tax income, and the payout goes to your nominated beneficiaries if you die during the term of the policy.
Key features of personal life insurance:
- Paid for personally using net income.
- Can be level, decreasing, or increasing term cover.
- May be written in trust for tax efficiency.
- Premiums are not tax-deductible.
Personal life insurance is typically used to protect your family by replacing lost income or repaying a mortgage.
What is relevant life insurance?
Relevant life insurance is a policy that an employer sets up and pays for, covering a single employee (often a director or key person). It pays out a lump sum to the employee’s family in the event of their death during employment.
Key features:
- Paid for by the company.
- Premiums are usually tax-deductible for the business.
- Not classed as a benefit in kind, so no additional income tax or National Insurance.
- The benefit is written into trust and falls outside of the estate for IHT purposes.
This makes relevant life cover a highly tax-efficient way to provide personal life cover through your business.
Key differences between relevant life insurance and personal life insurance
| Feature | Personal Life Insurance | Relevant Life Insurance |
| Who pays the premiums | You (personally) | Your employer or your company |
| Tax efficiency | Paid from post-tax income | Tax-deductible for the business |
| Impact on income tax | No tax relief | Not a benefit in kind |
| Use of a trust | Optional but recommended | Mandatory |
| Who it covers | Any individual | One employee per policy |
| Suitable for self-employed? | Yes (sole traders) | No (unless set up as a limited company) |
Why relevant life insurance can be more tax efficient
If you are a director of a limited company, paying for personal life insurance out of your salary or dividends can be costly. With relevant life insurance, your company pays the premium as a business expense.
This means:
- No income tax or National Insurance on the benefit.
- No Corporation Tax on the premiums.
- No impact on pension lifetime allowances.
- Potential savings of up to 49 per cent compared to paying personally.
Who should consider it?
You may benefit from relevant life cover if:
- You’re a company director or shareholder.
- You want to provide life cover for employees without setting up a whole group scheme.
- You’re looking for a tax-efficient alternative to personal life insurance.
- You want the policy to sit outside your estate for inheritance tax purposes.
If you are a sole trader, you won’t be eligible for relevant life cover, but a personal life insurance policy with a trust may still help reduce inheritance tax exposure.
FAQs
Is relevant life insurance just for large businesses?
No. Small businesses often use it, and small companies with just one or two directors.
Can a sole trader get it?
No. Sole traders typically do not qualify because an employer is required to arrange relevant life insurance for their employees.
Does it cover critical illness?
Not usually. Relevant life plans only cover death or terminal illness. If you need critical illness cover, this must be taken out separately.
Can I still get personal life insurance if I already have relevant life cover?
Yes. Many business owners opt for both – relevant life insurance for tax-efficient covert hrough the company, as well as personal cover for added peace of mind.
Do I need to set up a trust?
For relevant life insurance, the use of a trust is mandatory and is typically established simultaneously with the policy. For personal life insurance, a trust is optional but often recommended for faster payouts and tax efficiency on inheritances.
Conclusion
Relevant life insurance and personal life insurance can both protect your family financially, but the route you take should depend on your employment status, business structure, and tax planning goals.
If you’re a company director, relevant life offers a highly efficient way to protect without the tax drag of paying premiums from your pocket. If you’re self-employed or a sole trader, personal life insurance remains the best route.
Whichever you choose, ensure your policy is adequately structured, and consider consulting a protection adviser to receive tailored, regulated advice specific to your situation.
