Will Death in Service Insurance Affect My Employees' Personal Life Cover?
Question asked by Gemma Plante
I want to take out Life Insurance with Critical Illness Cover. That way, the insurance will protect me should I pass away as well as if I become seriously ill.
However, this doesn’t seem to be an option when I choose Relevant Life Insurance. Can you take out Critical Illness Cover with Relevant Life Insurance?
In most cases the answer is no, you cannot add Critical Illness Insurance to Relevant Life Cover.
This is because Relevant Life Insurance is company-owned. A business pays for it on behalf of a director, contractor or employee.
HMRC introduced Relevant Life Insurance to mirror Group Life Insurance. The motivation for this is because micro businesses would otherwise miss out on tax-efficient life cover. This is down to the fact that you need a minimum of three to five employees to set up Group Life Insurance.
HMRC introduced Relevant Life Insurance to address this issue.
Yet while Relevant Life Insurance as a standalone benefit is an allowable business expense according to HMRC, added Critical Illness Cover is not. HMRC has not signed off adding Critical Illness Insurance to your Relevant Life plan.
Doing so therefore risks losing the tax-efficient nature of a Relevant Life policy. This could see HMRC seek to claw back taxes due on the policy, both on premiums and the payout, which would otherwise be tax-free as a standalone policy.
So, while it’s certainly possible to take out Life Insurance with Critical Illness Cover, from our understanding of current tax legislation this is only an option if you do it personally.
This would mean paying for a combined Life and Critical Illness Insurance policy from your own bank account.
Another alternative could also be Company Director Income Protection. This is a tax-efficient policy that pays out a proportion of your earnings should you be off work for any medical reason.
HMRC has signed off Company Director Income Protection, unlike Critical Illness Cover as a business expense.