Relevant Life Insurance

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20-06-2021

Relevant Life Insurance (RLP) is a tax-efficient Life Insurance policy for business owners, directors or single employees paid for by a limited company. If the insured individual passes away, the cover pays out a tax-free cash lump sum benefit to financially support the loved ones of the deceased.

  • The premiums are paid for by the company and are typically an allowable business expense.
  • Payouts are typically not included in total maximum pension lifetime benefit calculations
  • The death in service benefit is paid out tax-free thanks to the trust structure set up alongside the policy.

It is particularly popular with business owners and contractors working through their own limited company / small business where it is not possible to set-up a group life scheme.

Relevant Life Insurance premiums can be as much as 49% cheaper than personal Life Insurance.

Can I Take Out A Relevant Life Policy?

When setting up group life insurance is not possible RLP is a tax-efficient life policy that might be an option to consider for:

However, relevant life insurance is generally unavailable to:

  • Sole traders
  • Those who only hold shares in the company and aren’t employed by the business.

You must fit certain eligibility criteria to ensure it is valid and all its tax savings remain in force. This includes having the correct employment status.

Why Is Relevant Life Insurance Important?

If you don’t have any debts or expenses to consider, you may not need a Relevant Life policy.

However, if you are a business owner worried about your loved ones struggling financially should you die, RLP is a tax-efficient life plan to protect your loved ones.

Based on ONS life expectancy data, the chances of a healthy individual of various ages passing away in the next 10 years is as follows:

Risk Of Dying In Next 10 Years

30 Years Old

1 in 112

40 Years Old

1 in 53

50 Years Old

1 in 23

How Does RLP Work?

RLP will provide your loved ones with a tax-free cash lump should you die.

When setting up cover there are a range of factors you need to consider to make sure it is appropriate for your needs.

How Much Cover Do You Need?

As a company paid policy insurers define the level of cover as a multiple of your income which can include your salary, bonus, regular dividends and the cash value of any benefit in kind.

The maximum level of cover is age dependant but most insurers will allow you to cover up to 15 x your total remuneration.

As an employee benefit many firms often provide around 4 x salary as a benefit. However, with Relevant Life Insurance you can decide on a level of cover and it is important to work out how much your loved ones would need should you pass away.

How Long Should Your Cover Last?

Where Relevant Life Insurance is a company paid policy the level of cover is often aligned with the policy holders expected retirement age.

You will need to decide on a cease age when setting up your cover and can choose any age right up to 75 years old.

Level Or Increasing Cover?

You can opt to increase your cover automatically each year in line with inflation.

There is an additional cost to include indexation as the level of cover will increase over time. However, it ensures your level of benefit is not eroded by inflation and maintains it’s buying power over the term of the policy.

Guaranteed Or Reviewable Premiums?

Guaranteed premiums tend to be more expensive from the outset however it does mean they are fixed over the life of the policy and can’t be increased by the insurer.

With reviewable premiums the insurer will look to review what you are paying every 5 years. They will look at things such as their claims experience, medical advances, any changes in law and the industry to decide on what premiums you should be paying for the next 5 years.

Although reviewable premiums often start cheaper they tend to work out more expensive over the life of the policy.

How Much Does Relevant Life Insurance Cost?

There are a number of factors that will determine the cost of Relevant Life Cover. Some are key policy factors you can control, such as:

  • Amount of cover
  • Length of cover

Other personal factors that you have less control over which will still impact on the cost of your policy include:

  • Age
  • Current state of health
  • Smoker status
  • Lifestyle and hazardous activities
  • Family history

We’ve used our Relevant Life Insurance Calculator to obtain quotes for three individuals aged 25, 35 and 45.

To calculate these premiums, we’ve assumed:

  • The individual is a healthy non-smoker
  • They’re an architect
  • They want £250,000 of level life cover paid for by the business over a period of 25 years.

Age

Monthly Premium

25 Years Old

£7.50

35 Years Old

£13.86

45 Years Old

£29.05

Relevant life quotes accurate as of January 2021

To calculate the cost of your own policy you are able to get instant online relevant life quotes comparing the top 10 UK insurers here →

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Calculating How Much You Can Save With Relevant Life Insurance

Imagine a Life Insurance policy which, on a personal basis, costs £100 a month. You’ve already paid taxes and national insurance contributions on the funds you use to pay the premiums.

This means, in effect, a higher-rate taxpayer has had to earn £196.21 within the business before they afford to pay a £100 Life Insurance premium.

However, you pay Relevant Life Insurance out of money before HMRC deducts taxes and national insurance contributions. A policy with exactly the same monthly premium could therefore save as much as 49% over a personal plan.

Personal Life Cover
Relevant Life Policy
Cost to Individual
Monthly Premium
£100.00
£0.00
Employee NI Contribution
£3.45
£0.00
Income Tax
£68.97
£0.00
Cost to Business
Premium
£0.00
£100.00
Employer NI Contributions
£23.79
£0.00
Gross Cost
£196.21
£100.00
Corporation Tax
-£37.28
-£19.00
Total Cost
£158.93
£81.00
Total Savings

49.03%

You can use our relevant life tax saving calculator to work out your exact savings based on your own premiums 🤓.

Relevant Life Insurance Calculator

Calculate the tax savings you can make by taking out a company paid Relevant Life Insurance policy instead of a personal Life Insurance policy.

  • £

How Does HMRC Tax It?

Relevant Life Insurance benefits from the same tax position as group death in service which is one of the most tax-efficient forms of term assurance with income tax, National Insurance and corporation tax relief.

IMPORTANT NOTICE 🧐
Before applying you should check with your accountant and your local inspectorate of taxes. First and foremost, in order to meet HMRC’s requirements, it must not be seen to be primarily for tax-avoidance.

Is It HMRC-Approved?

Yes, when relevant life cover is set up correctly it is typically:

  • A tax-deductible expense for the business (providing the local inspector of taxes agrees the scheme meets all relevant qualifying conditions)
  • Excluded from National Insurance calculations both for employer and employee
  • The lump sum death benefit is not subject to inheritance tax thanks to the fact you write it into trust from the outset.

A plan is also:

  • Only available up to a maximum age of 75
  • Available only where there is an employee / employer relationship
  • Not compatible with Critical Illness Cover
  • Only available as a pure protection policy with no surrender value or investment element
  • Permitted only where the benefit will be paid via a trust to an individual or nominated charity.

Most importantly, for Relevant Life Insurance to retain its tax-efficient status, you must not use the benefit for business protection. To protect your business, consider Keyman Insurance instead.

Is It a P11D / Benefit in Kind?

As long as the relevant life policy is structured correctly, despite the fact that the company owns and pays for the cover it is not a P11D Benefit. The employee / company director therefore usually has no additional tax to pay as a result of having this cover.

Do I Need a Trust?

Yes, a trust is integral to the policy.

It ensures the payout bypasses both the business and the estate of the deceased. This therefore avoids any nasty tax implications for either the company or the individual and their family.

Can I Include Critical Illness Cover?

No, it is our understanding of current tax legislation that you cannot include Critical Illness Cover.

Doing so negates the tax-efficient nature of the relevant life cover because HMRC has not signed this off as an allowable business expense.

What you may be interested in is a policy known as Executive Income Protection. If you become too ill or injured to work, it kicks in after a set waiting period to pay up to 80% of your remuneration (i.e. salary and dividends).

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Common Relevant Life Questions

  • Can It Be Converted To A Personal Policy?

    Most providers now offer the option to convert your relevant life insurance to a personal policy.

    Usually there is a short form to be completed and a new direct debit set-up.

  • What Is The Maximum Amount Of Cover I Can Get?

    Like a group scheme the level of cover is generally defined as a multiple of salary.

    Although it can vary most providers allow you to cover up to 15 times your total remuneration which can include your salary and dividend payments.

  • Can A Soletrader Take Out Relevant Life Insurance?

    One of the stipulations of Relevant Life Insurance is that it must be owned and paid for by the employer. Where a soletrader has no separate legal entity they are not eligible.

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Who Are the Best UK Relevant Life Insurance Providers In 2021?

There are multiple business protection providers in the market. Some have better additional benefits / support services than others, for example, while certain insurers will cover you for higher sums assured / multiples of remuneration.

Some of the best insurers include:

  • Aegon
  • AIG
  • Aviva
  • Legal & General
  • Liverpool Victoria
  • Royal London
  • Scottish Widows
  • Vitality
  • Zurich.

The Best Additional Benefits

Both group death in service and individual cover often come with additional benefits, and relevant life cover is no exception. These are support services you can use beyond just the ‘core’ element of the policy, which focuses on paying out on death or being diagnosed with a terminal illness.

For example, a typical additional benefits package might include one or more of the following:

  • Video / telephone GP services
  • Best doctors, for a second medical opinion service
  • Counselling sessions
  • Bereavement support for your loved ones in the event of a claim
  • Funeral pledge, to release a proportion of your funds early should they ever be tied up in probate and your family need cash for funeral expenses.

Compare Relevant Life Insurance Quotes & Get Expert Advice

While our relevant life cost calculator can provide instant online quotes, it’s very important to set up the policy correctly to take advantage of the tax breaks.

As an independent financial adviser we arrange our clients employee benefits from start to finish, doing all the heavy lifting to ensure you or an employee has the most suitable business protection in place.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We all deserve a first class service when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

If you need help setting up relevant life cover give us a call us on 02084327333 or email help@drewberry.co.uk.

Very good service from Rauri – he has been very helpful and thorough.

Kathryn Wright
16/05/2021
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