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Tax-efficient life insurance for business owners and directors

17.03.26

By Dee Myhill

Compared to a personal life insurance policy, relevant life insurance is a tax-efficient way for businesses to provide life cover to individual employees and directors. Similar to death-in-service benefits, these policies pay out a lump sum to beneficiaries if an employee dies or is diagnosed with a terminal illness.

These policies are especially suited to SMEs (small and medium-sized enterprises) that don’t qualify for larger group schemes. We examine how relevant life insurance can save your business money while supporting employees and their loved ones.

What is relevant life insurance (RLI)?

Relevant life insurance is a type of policy bought through a limited company to cover business owners, directors, and employees, offering a tax-free payout on death or terminal illness.

Unlike personal life insurance, which individuals buy for themselves, RLI policies are owned by the company paying the premium.

Is relevant life insurance the same as a death-in-service benefit?

No. While both provide financial support to beneficiaries if an employee dies while employed, relevant life insurance is a standalone life insurance policy owned by the business for an individual employee. Death-in-service is an employee benefit provided by the employer, and is usually linked directly to the employee’s salary.

Death-in-service is owned and provided by a business or organisation, with payouts usually a multiple of the employee’s salary. Employees are eligible only while employed by the company paying the premium.

Relevant life insurance policies are taken out on behalf of employees by a UK-based business entity (such as a limited company, LLP, or charity). Policies can also be moved from employer to employer or converted to a personal life insurance policy if an employee leaves a company.  

Why might business owners consider replacing personal life insurance?

Relevant life insurance is a more tax-efficient way to arrange life insurance because it’s:

  • Free from Income Tax (as it’s not considered a benefit-in-kind).

  • Exempt from Corporation Tax (as it’s an allowable expense).

  • Free from employer and employee National Insurance contributions.

Another benefit for employees is that payouts are not part of someone’s estate, so beneficiaries avoid probate. RLI payments are also exempt from Inheritance Tax as they are set up within a discretionary trust.

In contrast, personal life insurance is less tax-efficient, as premiums are paid from take-home salary, after Income Tax deductions.

Key benefits of relevant life insurance (over personal life insurance)

Relevant life insurance is an option for businesses that want to provide life cover for individual employees. Key benefits include:

Tax-efficient

  • RLI can help lower Corporation Tax liability.

  • Beneficiaries receive a tax-free payout.

  • Exempt from Income Tax and Inheritance Tax (if set up correctly).

  • Does not count towards pension allowances.

Cost-effective

  • The business pays the premiums, freeing up personal funds.

  • Due to the tax efficiencies, it may cost less than personal term life insurance for business owners or directors.

Flexible and simple set-up

  • Suitable for a wide range of businesses that may not require group life insurance.

  • Can cover multiple directors or key employees under separate policies.

  • Employees can transfer policies to a new employer.

  • Supports strategic business planning, as policies can be updated if the business structure changes.

What key considerations are there when it comes to RLI?

Policies are aimed at directors and employees of UK-based businesses. It’s not available to sole traders or partners.

If you’re thinking about setting up relevant life insurance for your business, you’ll also need to ensure the policy is arranged correctly (in a discretionary trust) to benefit from its tax efficiencies.

How we can help

If you think it’s time to review your personal life insurance policies and want to compare costs and benefits with relevant life insurance, our financial planners are on hand to help.

As well as navigating you through your options, we can manage your policy, ensuring it is compliant and properly structured, so that you and your employees enjoy the full range of benefits. We can also help coordinate your needs alongside broader business protection and estate planning strategies.

The value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future. The value of tax benefits depends on your individual circumstances. Tax laws can change.

Looking for help with business protection?

To find out more about RLI or to explore more financial planning options for your business, speak to a member of our team.

Speak to us:  01603 967967
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