Life insurance is important for most people, and essential for anyone with a partner or dependants.
A high level of cover can provide a cash lump sum to pay off a mortgage and an income for our loved ones if we could no longer be there to provide it ourselves.
But if you are a company director, a key employee or an employer, the advantages need not stop there.
At Continuum we are looking at Relevant Life cover.
What is Relevant Life cover?
Many businesses provide some form of life cover for valued employees. It is an important benefit, helping retain staff and demonstrating a commitment to their welfare.
The usual form is a Death in Service policy which can be easily arranged as a group scheme. However, the premiums on a Death in Service policy may be taxable, meaning that the employee faces a deduction from their salary.
A relevant life policy can offer the same kind of vital cover, without the tax penalties
How Relevant Life cover works
Like Death in Service cover, a Relevant Life policy is set up by a business to provide cover for employees ensuring that their family and dependents will receive a lump sum in the event of their death. Premiums are paid and the policy owned by the employer. Terminal Illness cover is included, which could pay out if the employee, is diagnosed with a terminal illness, with life expectancy of less than 12 months.
The policy is placed into a Relevant Life Plan Trust, making them tax efficient for both employee and employer. They are considered a business expense and therefore reduce taxable profits. They do not require any contribution from the employee, nor do they count as a taxable benefit in kind. Employers save nearly 50% in tax compared to an ordinary life policy while employees can receive their cover without any kind of additional cost.
Because premiums can be deducted before profits are calculated, Relevant Life cover can reduce corporation tax liabilities. They are also not liable for National Insurance. Both employer and employee can be better off with a Relevant Life policy.
Better cover for employees
The benefits for employees don’t stop there.
Death in Service insurance policies are often provided through the company’s pension scheme. This means they count towards the pension lifetime allowance, currently £1,073,100 With schemes regularly offering up to four times annual salary, many highly paid key employees would exceed the threshold if a claim is made. The 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.
Relevant Life policies can also be portable. Death in Service benefits cease if an employee leaves or the firm is wound up and replacing the cover may prove expensive especially for older workers and those with medical conditions. A Relevant Life policy 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 require full medical underwriting. This tends to make them only suitable for key people who will stay with the business.
They are therefore ideal for:
Company directors. A Relevant Life Policy provides a valuable tax benefit if directors life insurance premiums are paid by their company.
High earners. Relevant Life Polices don’t count towards the Lifetime Allowance, above which tax is currently charged at 55%.
Key employees – A Relevant Life Policy can provide tailored levels of cover, allowing you to reward or incentivise – and retain – your most vital human assets.
Arranging Relevant Life cover can save money for business owners and their staff – but you may want to arrange additional insurance, such as critical illness cover.
To arrange the cover at the right price and comply with all the requirements of HMRC, you need the help of an adviser with expertise in company and personal taxation as a well as insurance.
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 strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
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The Financial Conduct Authority does not regulate taxation and trust advice.