Why Relevant Life Insurance?
Relevant life insurance is a tax efficient way of providing an employee/director with a lump sum death benefit.
Life Insurance premiums which are paid for by the company and may be treated as a business expense.
Any cash sum payable to the employees’/directors’ beneficiaries on death would also be paid out tax free.
Speak to our expert independent advisers and get quotes from all of the UK’s leading business protection insurers.
What does Relevant Life Insurance cover?
A relevant life policy is a simple term assurance product which pays out a tax free lump sum (often set at a multiple of salary) to the policyholder’s loved ones should they pass away during the term of the policy.
Why use Relevant Life Cover?
There are cost savings available when using a relevant life policy due to it’s tax efficient nature.
It is important to note that to ensure the policy meets the tax efficient criteria it must be structured as a simple level term life assurance product which does not include any element of Critical Illness Cover.
How does a Relevant Life Policy work?
The policy is underwritten on the individual’s life however it will always be owned by the business itself.
The individual covered by the policy passes away.
The business makes a valid claim with the insurer.
The insurer pays the sum assured into the relevant life trust.
The benefit is then distributed to the nominated beneficiaries.
Do we need Relevant Life cover?
Should you be providing the individual with life insurance? Would your competitors? Given the tax savings available it would be silly not to provide this as a core benefit.
What is the risk of passing away?
Based on ONS life expectancy data (2008-10), the chances of someone passing away within the next 10 years are as follows:
30 years old
40 years old
50 years old
1 in 112
1 in 53
1 in 23
Research from Met Life in 2012 revealed that 21% of people have suffered long term ill health during their working life so critical illness cover is a very important policy addition.
Your Key Options
Being Independent Insurance Advisers we pride ourselves on being the experts, knowing every insurance product we offer inside out and back to front. Here’s how we work –
The Fact Find:
We will talk you through the options available and capture vital information about the person(s) to be covered.
We go out to all leading business protection insurers to gain the most competitive quotes.
We email you a short report with our product and insurer recommendations for the various options we’ve discussed. When you are happy to go ahead in many cases we are able to complete the application for you over the phone.
Ciaran was Brilliant and provided a thorough service that delivered exactly what I was looking for. Very paitent and made even the most complex terminology sound simple.Kato Mukasa
What is Relevant Life Insurance?
Traditionally, there have been two generic ways of providing life insurance to an individual:
- Personal cover taken out by an individual;
- Personal cover for an individual provided by a company (group) scheme. This has typically been called group insurance.
A variation on these two traditional approaches is now offered by what is sometimes called Relevant Life Cover.
In terms of the basic principles, at face value this is not significantly different to other forms of life cover. Broadly speaking, upon death of the insured or other qualifying conditions, a lump sum is paid to their stated beneficiaries.
Who Can Benefit from Relevant Life Cover?
A relevant life policy is designed to provide cost effective life cover for:
- Higher earning employees who do not want their death-in-service benefits to form part of their lifetime allowance, and who have substantial pension funds.
- Small businesses who want to provide a level of company paid life cover whether for an employee or director but do not have enough eligible employees to qualify for a group death in service scheme.
As is the case with larger organisations and group insurance schemes, employees typically value and appreciate the provision of such cover for their families. In the case of very small organisations, a relevant life policy may be the most practical way of delivering this type of benefit to them.
It may also be particularly tax-efficient for higher-earning individuals as the benefit provided is typically not included in their total lifetime maximum allowable benefit calculations.
It might be particularly suited to the directors of small companies who use their personal income to service their life cover premiums.
Typically this type of cover is only available in circumstances where there is an employer/employee relationship. As a result, it might typically not be applicable to sole-traders or partners in a partnership etc.
What's the Difference Between Relevant Life and Keyman Insurance?
Relevant Life Cover
Relevant Life Insurance is more used as a personal life cover policy for company directors paid for by the business. It’s similar to Group Life Insurance but usually taken out where there aren’t enough employees to qualify for such a scheme.
Although the premiums are paid for by the company, it’s important to note that any benefit is ultimately paid to the family of the employee. After death, the benefit is paid into a relevant life trust owned by the company and then distributed from there, sidestepping any Life Insurance inheritance tax issues. The premiums are usually eligible for full corporation tax relief, also.
Relevant Life Cover is therefore an incredibly tax-efficient way of providing life cover for a sole trader or company director.
Keyman Insurance – also known as Key Person Insurance – is a policy taken out by an employer to cover a key member of staff.
While the policy is still underwritten on the individual’s life and is paid for by the company, unlike Relevant Life Insurance the payout is for the business.
In the event of the death (or incapacity through critical illness, if you add this to your policy) of the key insured person, the company receives the payout to compensate it for potential loss of profits.
The way Keyman Insurance is taxed depends largely on how the policy is set up and who is to receive the benefit. If the benefit is ‘wholly and exclusively for the business’ then generally premiums are eligible for corporation tax relief.
However, the payout will be treated essentially as a trading receipt and taxed accordingly, so you’ll need to gross up the payout by your corporation tax rate to ensure you get the required figure.
Where the policy is to benefit shareholders or a lender it’s more complicated, as this isn’t ‘wholly and exclusively’ for the benefit of the business. Here it may not be possible to qualify for corporation tax relief on premiums.
We strongly recommend that you speak with your accountant when it comes to the tax treatment of Keyman Insurance so that you can be sure you’ve got the correct tax advice. It may also be worth mentioning to your accountant that you’ve got Relevant Life Cover in place, too.
Business Protection Expert at Drewberry
Why Relevant Life Cover?
The need for life insurance is clear to many individuals. However, depending upon the person’s individual circumstances, providing such cover may be expensive particularly if the individual concerned is paying for it directly from their own daily income.
An alternative approach that has been popular with employers and employees for many years is the concept of Group Scheme insurance.
This essentially means individual employees or directors can benefit from life insurance provided by the legal entity employing them. This is typically tax-efficient and often perceived as a significant recruitment or employee retention strategy on the part of the employer.
However, some group schemes are typically designed for medium to larger sized enterprises and might not always have been seen to be cost-effective for very small organisations that were unable to meet the qualifying members minimum numbers associated with such cover.
Relevant Life Cover addresses these concerns by providing cover for small groups of employees or even individual directors.
Tax-deductible Relevant Life Insurance Premiums
It is important to note that your tax liabilities may vary depending upon a significant number of factors. What follows should not be read as formal taxation liability advice for any given individual.
However, what can be said is that typically this type of cover is:
- Not classed as a taxable benefit in kind for the receiving employees;
- Treatable as a tax deductible expense for the providing organisation (providing the local inspector of taxes agrees with the providing organisation’s compliance with all relevant qualifying conditions);
- Excluded from NI calculations both for the employer and employee.
For example, someone paying £100 a month in life insurance premiums via a non relevant life plan (perhaps a self employed Director who pays his/her life cover from his/her personal income) would need to earn the equivalent of £128.21 to cover this amount. Including company costs (for NI contributions and less corporation tax etc), the overall payable amount for £100 worth of cover would be £116.72.
Via a relevant life plan, there would be no costs from his/her personal income and the overall cost for £100 worth of cover would be £80.00. This is a saving of £36.72 and 31.46%.
From this it can be seen is that there are a number of significant tax-efficiency advantages to providing this sort of cover.
It is important to note, however, that in order to meet HMRC qualifying requirements, the purpose in providing such a scheme must not be seen to be primarily as tax-avoidance.
Relevant Life Insurance Calculator - Example savings
This example calculated by Legal & General – Source: http://www.legalandgeneral.com/advisercentre/campaigns/business-protection/rlp-calculator.html
Need Relevant Life Cover Advice?
We are a fully independent insurance intermediary, so are not tied to any one insurer which means we can help you cherry pick the most suitable cover for you.
We will be only too happy to speak with you on the subject of a relevant life policy or any other form of group life insurance scheme.
Please do not hesitate to contact us for a full, confidential and entirely non-committal discussion. Simply give us a call on 02084327333.
Relevant Life Insurance Calculator
Your Relevant Life Tax Savings
These calculators help but sometimes it doesn't beat talking to a human. If you
need any support please do not hesitate to pop us a call on 01273646484.
Business Protection Expert at Drewberry
The tax treatment of Relevant Life Cover is based on the policy being wholly and exclusively for the purpose of trade. Cover can be offered to an employee as part of that employee’s remuneration package, which is competitive relative to what they could attract in the open market. The purpose of providing such a scheme must not be primarily to avoid tax.
Speaking to an expert adviser is highly recommended before entering into this type of arrangement to ensure the plan is set up correctly and you aren't falling foul of any tax rules. The team at Drewberry is here to help – just pop us a call on 01273646484.