As the pandemic has demonstrated all too clearly, none of us know what life holds for us. It is a reminder of how essential life insurance is to provide a financial safety net for our loved ones if we could not be there to provide it ourselves.
But at Continuum we know that not only are there many different types of life insurance, there are many ways to provide it.
One of these is Relevant Life cover. It can be a financially astute solution whether you own and run a small business – or if you are a key member of staff.
What is Relevant Life cover?
Many businesses now provide life cover for key staff members as part of their remuneration package, providing very worthwhile peace of mind for valued employees.
The usual form is a Death in Service policy, which is provided for a group of employees. Like Death in Service cover, a Relevant Life policy is life insurance set up by a business to provide cover for an employee and provide a lump sum to an employee’s family and dependents in the event of their death.
However, a Death in Service policy may be taxable. Like many other worthwhile benefits it becomes much less attractive when you realise that you will be paying tax on them.
A relevant life policy can offer the same kind of vital cover, without the tax penalties.
This means advantages both for employees, and their employers.
The benefits for employers
Relevant Life policies also bring attractive tax advantages for business owners and directors.
They are considered a business expense and are therefore paid before taxable profits are generated. This means that they do not require any contribution from the employee or count as a taxable benefit in kind. Employees can enjoy the cover they need without any kind of financial penalty.
What’s more, because they are made before profits are calculated, they reduce corporation tax liabilities. They are also not liable for National Insurance.
Both employers and employees can be better off with a Relevant Life policy.
In most cases Relevant Life Plan premiums and benefits enjoy full Income Tax relief, National Insurance relief and Corporation Tax relief.
The benefits for employees
A Relevant Life policy can provide a lump sum to an employee’s family and dependents in the event of their death. However, the tax rules allow it to provide significant advantages, the most important being a larger payout.
Death in Service insurance policies are usually offered through the company’s pension scheme. This means they count towards the tax-free pension lifetime allowance, currently £1,073,100 as per tax year 2020/2021. With schemes regularly offering up to four times annual salary it would be very easy, particularly for highly paid key employees to exceed the threshold if a claim is made. Any payout would be reduced by a lifetime allowance excess tax charge, leaving less money to support surviving dependents.
A Relevant Life policy sits outside of an individual’s pension provision. It is written into trust and so not subject to a lifetime allowance test. The bereaved would be able to receive all the money.
Another important advantage is that Relevant Life policies can be portable. If an employee leaves or the firm is wound up, any Death in Service benefit will be lost. Replacing the cover may prove expensive or even impossible, especially for older workers and those with medical conditions.
A Relevant Life policy however can be transferred to the person covered, allowing them to take over premium payments and maintain the cover even after they have left the original employer.
Who should have cover?
Relevant Life policies usually require full medical underwriting, unlike Death in Service which makes them relatively costly in terms of the time and administration required to set them up. This tends to make them only suitable for key people who will stay with the business – although Relevant Life policies can be portable.
Unlike Death in Service benefit, Relevant Life cover can be transferred to the person covered, allowing them to take over premium payments and maintain the cover.
Arranging Relevant Life cover has never been more important and can save money for business owners and their staff – but to comply with legislation Relevant Life cover can only provide life insurance.
You may need to arrange additional insurance, such as critical illness cover to ensure the level of protection is not jeopardised.
Fortunately, at Continuum we are perfectly placed to provide it. Simply call our business team.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation advice.