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What is Relevant Life Insurance? How Much Does It Cost?
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10-11-2020
Relevant Life Insurance (RLP) is a tax-efficient Life Insurance for company directors or single employees paid for by a limited company. If the insured individual passes away, the plan pays out a tax-free cash lump sum to financially support the loved ones of the deceased.
The business pays for premiums, which are typically an allowable business expense. The policy’s tax-efficient structure means premiums can be as much as 49% cheaper compared to a similar personal Life Insurance plan.
It is particularly popular with contractors working through their own limited company / small business where it is not possible to set-up a group life scheme.
In this guide, we’ll cover:
- How it works
- Who is eligible for cover
- HMRC’s tax treatment of the policy — including how directors can save almost 50% on premiums
- The importance of a Relevant Life Trust.
You’ll also be able to get instant quotes comparing the top 10 UK insurers 😎
Can I Take Out A Relevant Life Policy?
It is a tax-efficient life insurance policy that might be an option to consider for:
- Contractors
- Company directors
- Micro businesses where there aren’t enough employees for a group Death in Service scheme
- Situations where high earning employees have substantial pension funds and may face a pension lifetime allowance issue.
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.
How Much Does Relevant Life Cover 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 |
Quotes accurate as of 10/08/2020
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How Does HMRC Tax It?
Relevant Life Insurance is one of the most tax-efficient forms of term assurance and includes 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
- 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.
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).
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.
How Much Tax Can I 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 🤓.
Who Are the Best UK Relevant Life Insurance Providers?
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 schemes 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 can arrange the insurance from start to finish, tying up all the loose ends 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 issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.
- There is no fee for our service
- We are independent and work with all the leading UK insurers.
- You’ll speak to a dedicated expert from start to finish
- We are very proud of the 2906 and growing independent client reviews rating us at 4.92 / 5
- Benefit from the protection of regulated advice
- Claims support when you need it most.
If you need help setting up relevant life cover give us a call us on 02084327333 or email help@drewberry.co.uk.
The staff have been very knowledgeable and I have enjoyed working with Nadeem on setting up our plan.
Kim S
22/06/2020
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