A Director's Terminal Diagnosis and a Relevant Life Policy

A relevant life policy is sold to directors on the strength of one line: the company pays the premiums and the cost is not usually a benefit in kind. That pitch is aimed at the healthy applicant. It says almost nothing about what happens at the other end, when the director is the one dying and someone has to work out who actually claims the money. The short answer is that it is not the company, and it is not automatically the director either. It is the trustees, and understanding what that means changes how you should be thinking about the policy right now.

This article is written for that later stage rather than the sales stage. If you are the director, a spouse, or the person who will end up dealing with the paperwork, the questions that matter are: who is entitled to claim, what a relevant life policy terminal illness claim actually involves, and what happens to cover if the director stops being an employee before a claim is ever made.

Why the trustees, not the company, hold the claim

The whole point of a relevant life policy is that it is not owned by the company in the way that key person cover is. The employer arranges the policy and pays the premium, but from day one the benefit is held in trust for the director's chosen beneficiaries. That structure is what keeps the eventual payout outside the company's accounts and outside the director's estate.

Practically, this means the people named as trustees, usually including the director's spouse or another family member alongside perhaps a professional trustee, are the ones who complete the claim form, deal with the insurer, and eventually distribute the money according to the trust's terms and any letter of wishes. The company's role by this point is administrative: it may need to confirm the director's employment history and dates, but it does not receive a penny and has no say in who the trustees pay.

This is a different arrangement to company-paid life cover that sits inside the business, where the company itself is the beneficiary and the money is used, for example, to buy back shares. If you are unsure which kind of policy is in place, the trust deed will say, and it is worth checking well before a diagnosis rather than after one.

Does relevant life cover include terminal illness benefit?

Many relevant life policies, like ordinary personal term policies, include a terminal illness benefit as standard. It works the same way it does outside a trust arrangement: where a consultant expects death within twelve months, the insurer will usually pay the sum assured early, as an advance of the death benefit rather than as a separate payment. Once it has been paid, the policy ends.

The difference under a relevant life plan is only in where the money goes. Because the policy is held in trust, an early payment under terminal illness benefit goes to the trustees, exactly as a death claim would, rather than directly to the director. The trustees then hold and distribute the funds under the terms of the trust. This matters practically: a director expecting to receive money personally to cover living costs or medical care may be surprised to find that the cheque, in effect, goes to their spouse or co-trustee first.

Not every policy includes this benefit on the same terms, and some older or more basic relevant life plans exclude it altogether, or apply it only in the early years of the term. The policy schedule will confirm exactly what is included, and it is sensible to check this as soon as a diagnosis is suspected rather than assuming the benefit applies. If the terminal illness route does not apply, or the prognosis does not meet the twelve-month test, our general guide to how to claim terminal illness benefit sets out the evidence insurers usually want, most of which applies here too.

What a relevant life terminal illness claim actually involves

Making the claim is broadly the same process as any other terminal illness claim, with one extra layer of paperwork because of the trust. The trustees, rather than the director, are the claimants, so the insurer will want to see the trust deed alongside the medical evidence.

In practice a claim generally needs: the original relevant life policy documents and the trust deed naming the current trustees, medical evidence from the treating consultant confirming that death is expected within twelve months, and confirmation from the company of the director's employment dates and, usually, that they were still employed and the policy still in force at the point the claim arose. Insurers vary in how quickly they process this, but a claim that is well documented from the outset, with the trust paperwork already in order, moves faster than one where trustees have to be identified or the deed has gone missing.

This is also where the difference between a relevant life plan and a personal policy in trust becomes relevant in practice. If you separately hold personal cover, our note on why a relevant life policy sits outside the estate explains the mechanics in more detail, and is useful background if an adviser or accountant needs convincing that the company should not be involved in the claim at all.

What happens if the director leaves the company while ill

This is the point in the story that catches people out, because relevant life cover is fundamentally an employment benefit. It is arranged by, and tied to, the company, which means that when the employment ends, the cover usually ends with it. A director who resigns, retires, or is removed from the payroll while seriously unwell can find that the policy lapses at exactly the point it is needed most.

Some insurers will allow a policy to be transferred to a new employer, or occasionally converted into an individual policy, but this is not guaranteed and depends on the specific insurer's terms and on making the request while the policy is still active and the director is still, technically, an employee. It is not something to discover by accident after the event.

The practical rule is straightforward: nobody with a relevant life policy in place should come off the company payroll, resign a directorship, or agree to any restructuring of their employment status while a terminal illness claim is being considered, without first checking with the insurer or a broker what effect that will have on the cover. This applies even where the change looks purely administrative, such as moving from an executive to a non-executive role, because the insurer's definition of continuing employment is contractual rather than common sense. If the director's role is also changing because the business itself is under strain, it is worth reading around what changes for a company when a director dies to understand how the wider business picture and the insurance position interact.

Because cover ends with employment, it is also worth checking early whether other death-in-service arrangements the director holds are affected in the same way. Our piece on death-in-service cover ending on the last day of employment covers a closely related trap that often surprises families at the same moment.

Who actually receives the money, and when

Because the policy is written in trust, the payout does not pass through the director's will and does not normally need to wait for probate, or confirmation in Scotland, before it can be distributed. The trustees can generally release funds to the beneficiaries named in the trust once the claim has been paid, which is often considerably faster than money that is tied up in the estate.

This is also why it matters that the letter of wishes and the list of trustees are kept up to date. A relevant life policy set up years ago may still name a trustee who has since moved abroad, fallen out of contact, or is no longer suitable, and updating this is far easier to do calmly in advance than to sort out during a terminal illness claim. If the trust arrangement also needs to interact with inheritance tax planning around the wider estate, the position is generally favourable, because trust-held proceeds normally sit outside the estate calculation in the same way as other policies held in trust.

Source: HM Revenue & Customs, guidance on relevant life policies and their tax treatment, gov.uk.

Practical steps to take now, before a claim is needed

Whether the director is currently well or has just received a difficult diagnosis, the same checklist applies. Locate the trust deed and confirm who the current trustees are, and that they know they hold that role. Confirm with the insurer or broker exactly what the policy includes, including whether terminal illness benefit applies and on what terms. Ask specifically what happens to the policy if the director's employment status changes, in writing, before any change is made. And make sure the trustees, not just the director, know the claim process and have access to the relevant documents.

None of this is complicated, but it is easy to leave undone precisely because relevant life policies are usually arranged by an accountant or adviser at the outset and then not looked at again for years. A short review now, while everyone is well, avoids a scramble for paperwork during an already difficult time. If a diagnosis has already been received, moving quickly on this checklist, rather than waiting for symptoms to worsen, gives the trustees the best chance of a smooth and timely claim. Anyone reassessing their overall protection at this point, including whether personal cover alongside the company scheme still makes sense, can get life insurance quotes to compare options.

Scotland and Northern Ireland

Relevant life policies are sold on the same basis across the UK, and the trust mechanism that keeps the payout away from the company and out of the estate works identically wherever the director lives. What differs, if the money ever needs to interact with the wider estate, is the process: in Scotland the equivalent of probate is confirmation, granted by the sheriff court, and in Northern Ireland probate is handled through the local court service. Because a properly constituted trust generally avoids needing either process for the policy proceeds themselves, this distinction matters less here than it does for cover held outside a trust, but it is still worth knowing if the trustees also act as executors of the wider estate.

Frequently asked questions

Who claims on a relevant life policy?

The trustees make the claim. A relevant life policy is arranged by the company but written in trust from the start, so the trustees deal with the insurer and pay the beneficiaries. The company never receives the money, and the proceeds do not pass through the director's estate.

Does relevant life cover include terminal illness benefit?

Many policies do, applied in the same way as personal cover: the insurer pays the sum assured early where death is expected within twelve months. Because the policy sits in trust, any early payment goes to the trustees rather than directly to the director, so it is worth checking the specific policy wording to confirm this applies.

What happens if the director leaves the company?

Cover is tied to employment, so it usually ends when the employment ends, although some insurers will allow the policy to be transferred to the individual or to a new employer if this is arranged in time. Nobody should resign or come off the payroll while unwell without checking this first.