Most of us understand life insurance, and why it is vital 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 there are many variations on basic life insurance, which can be used in a number of ways. We help ensure our clients can secure the option that is best for them.
Relevant Life cover allows a business to provide life insurance usually for specific employees, (sometimes firms will incept this type of cover when there are too few employees eligible for a group scheme) – while enjoying some valuable tax advantages.
What is relevant life policy?
A Relevant Life policy is life insurance set up by a business to provide a death benefit for an employee.
Like a death in service policy, it provides a lump sum to an employee’s family and dependents in the event of their death. It can be an important extra in a remuneration package, providing peace of mind for valued employees. However, it may be taxable. A relevant life policy can offer the same kind of cover, without the tax penalties.
Businesses offer a wide range of benefits to attract the right people. Unfortunately, many benefits, from subsidised canteens and company cars also attract tax. So does Death in Service cover.
Death in Service insurance can be offered through the company’s pension scheme, which means the death benefit may count towards the individual’s lifetime tax-free pension allowance if they were to die before age 75 any death benefits paid to a beneficiary within two years of death would count against the deceased’s lifetime Allowance. When Lifetime Allowance was reduced in April 2006 ‘A Day’, schemes offering up to four times annual salary suddenly made it possible for highly paid key employees to exceed their lifetime allowance. The lifetime allowance for tax year 2020/21 now stands at £1,073,000.
Any Death benefit payout, which meant the individual exceeded their Lifetime Allowance would be reduced by a lifetime allowance excess tax charge leaving less money to support surviving dependents. but the risk of exceeding it, and the benefits going to the taxman remain.
How a relevant life policy works
Relevant life policies can provide a solution that allows the payment to be made without any tax liabilities. A relevant life policy is written to sit outside of an individual’s pension provision. This means that they do not require any contribution from the employee or count as a taxable benefit in kind. They can be written into trust, so any payout would not be subject to a lifetime allowance restriction. Employees can enjoy the cover they need without any kind of financial penalty.
The bereaved would be able to receive all the money.
But the tax advantages don’t stop there. Relevant Life policies also bring benefits for business owners.
This is because they are considered to be a business expense and therefore paid before taxable profits are generated. This means that 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.
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 policy however can be transferred to the person covered, allowing them to take over premium payments and maintain the cover.
What should you do?
Business owners switching to relevant life policies to replace death-in-service policies can save money for themselves and their staff – but to comply with legislation Relevant Life cover can only provide life insurance.
To maintain the level of cover your team needs may require separate critical illness cover to be arranged. To ensure that you secure the best value cover, and even more important comply with all the requirements of HMRC, it is vital to get the help of an adviser with expertise in taxation as a well as insurance.
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 investment 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.