Why Relevant Life Insurance?
Relevant Life Cover is a tax-efficient way of providing a single employee or director with a lump sum death benefit.
If the individual passes away it pays out a tax-free cash lump sum to financially support their loved ones during such difficult times.
The premiums are paid for by the company and are typically an allowable business expense.
Speak to our expert independent advisers and get quotes from all of the UK’s leading business protection insurers.
What is a Relevant Life Policy?
A Relevant Life Policy is a type of Life Insurance specifically designed to protect a single employee or director. Traditionally, there have been two ways of providing individuals with Life Insurance:
- Personal cover taken out by an individual;
- Cover taken out by employers to protect groups of employees under the same policy (most often known as death in service).
Relevant Life plans, on the other hand, are a variation of these two traditional approaches, allowing people to take out individual life cover for themselves through (and paid for by) their company resulting in cost savings due to its tax-efficient nature.
Aside from this detail, Relevant Life Insurance is not too different from personal Life Insurance. Broadly speaking, upon death of the insured or other qualifying conditions, a lump sum is paid to their stated beneficiaries.
How Does Relevant Life Cover Work?
Relevant Life Cover in its simplest form is very similar to a term life insurance policy and works in much the same way paying out a cash lump sum on death. The vital difference is that the company is setting up the policy and paying the premiums to protect the employee or director.
- If the covered employee dies whilst the policy is in force, the insurer will pay out a lump sum into a trust owned by the company.
- The benefit payment is then distributed to the appropriate persons, usually the employee’s loved ones.
- Paying the benefit via a trust allows the payout to avoid inheritance tax.
While directors and owners of small companies often take out policies for their employees as an employee benefit, more often than not Relevant life Insurance policies are taken out by business owners to cover themselves.
It is also the most tax-efficient option for high earners, qualifying for a number of different tax reliefs on premiums and the payout.
Do I Need Relevant Life Insurance?
If you don’t have any debts or expenses to consider, you may not need a Relevant Life policy. But, if you worry about your loved ones struggling financially should you die, it is a tax-efficient way to purchase life insurance to protect your loved ones.
If you are a small business owner and want to give something back to your employees, Relevant Life Insurance can also be a great employee benefit to offer when there are not enough employees to qualify for a Group Life Scheme.
Who Can Benefit from Relevant Life Cover?
Relevant life insurance is designed to provide cost effective life cover for:
- 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.
- 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.
The three greatest benefits of a Relevant Life policy for those that own a policy are:
- It’s tax-efficient
- Premiums are paid for by the business
- Payouts are typically not included in total maximum pension lifetime benefit calculations
- The benefit is paid out tax-free.
Whats 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:
1 in 112
1 in 53
1 in 23
With 2 out of 5 people in the UK having less than £100 at the end of the month, many employees are feeling the stress of financial uncertainty and perhaps wouldn’t pay for life cover out of their own pockets.
How much does Relevant Life Insurance cost?
There are a number of factors that will determine the cost of Relevant Life Insurance, some of key policy factors which you can control include:
- Level of cover
The more cover you require the higher the premium for the policy.
- Length of cover
The longer the policy term the higher the risk of needing to claim and this is reflected in higher premiums.
Other personal factors that you have less control over which will still impact on the cost of your policy include:
- Your age
The older we are, the greater the risk of passing away during the term of the policy
- Your current state of health
Those with severe health conditions, especially those which might limit life expectancy, will typically pay more for Life Insurance to reflect the greater risk the insurer is taking on
- Your smoker status
If you smoke, you’re at greater risk of developing a serious, fatal health condition and so insurers will charge more
- Lifestyle and hazardous activities
Lifestyle habits, such as regularly drinking more alcohol than is recommended, or participating in hazardous activities, could result in an insurer increasing the cost of your cover
- Family history
Has any of your immediate family ever suffered a serious and/or hereditary illness that may impact you? If so, you may pay more for life cover.
You can use our Relevant Life Insurance comparison tool to get instant online quotes from the UK’s leading insurers including Aviva, LV and Legal & General.
Communicative and trustworthy. My thanks to Jake Mills for being a consummate professional.Jacqueline Ainsworth
Common Relevant Life Insurance Questions
What is the tax treatment of Relevant Life Insurance?
Below is a list of our current understanding of HMRC’s tax rules surrounding Relevant Life Insurance, before applying for cover this something you should check with your accountant/your local inspectorate of taxes:
- Is not classed as a taxable benefit in kind for the receiving employees;
- Is 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);
- Is excluded from NI calculations both for the employer and employee.
- Avoids inheritance tax by being written into a company owned trust.
Can I include critical illness insurance?
Where Relevant Life Insurance is designed to replicate Death In Service for a single employee one of the requirements to qualify for the preferable tax treatment is that it does not include Critical Illness Cover.
Many Contractors who we help set-up their Relevant Life Policy end up choosing to take out Executive Income Protection instead of a Critical Illness Policy as not only does it provide a more comprehensive level of cover for their income, it can also be paid for by their business.
Is it a P11d benefit in kind?
So long as the policy is structured correctly even though the company owns and pays for the policy it is not a P11d benefit in kind so there is no tax to pay by the employee/director.
Even though there is no tax to pay on the premiums so long as the policy is in trust, any benefit payable should a claim arise will also be free from inheritance tax.
Are contractors eligible for relevant life cover?
Relevant Life cover is extremely popular with Contractors and Directors of their own limited company. Although Contractors tend to undertake project work for lots of different companies they will be employed through their own limited company paying themselves a small salary and the rest of their income in dividends.
We often help Contractors replicate the benefits they had in previous employment which tends to include Death In Service, Income Protection and Private Medical Insurance. We try to help them do this in the most tax-efficient way which means taking advantage of products like Relevant Life Insurance where we can.
What are the tax savings?
A higher-rate taxpayer paying £100 a month in Life Insurance premiums via a standard personal plan (perhaps a self employed Director who pays his/her life cover from his/her personal income) would need to earn the equivalent of £172.42 to cover this amount.
Including company costs such as employer NI and personal tax paid, the overall payable amount for £100 worth of cover would be £158.93.
With a Relevant Life plan, on the other hand, there would be no costs from his/her personal income and as it is an allowable business expense the overall cost for £100 worth of cover would be £81.00. This is a saving of £77.93 or 49.03%.
From this it can be seen 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.
Is it HMRC approved?
There are a number of conditions that need to be be met in accordance with HMRC to ensure the policy benefits from the favourable tax position.
- The policy must be term life insurance with a maximum policy length of up to age 75.
- The policy must be a pure protection policy with no surrender value or investment element.
- The individual covered must be employed by the company taking out the policy and not be solely a shareholder. Sole traders or anyone self employed would not meet this criteria as there is no employer.
- Any benefit payment must be paid via a trust to an individual(s) or nominated charity. The benefit is not for the use of the company and is intended for beneficiaries of the covered individual only.
Compare Relevant Life Insurance Providers
Aegon, originally known as Scottish Equitable, has received 5 star Defaqto ratings for its service. Aegon has around 3.5 million customers in the UK alone and operations in more than 25 countries.
With Aegon employees will also have access to Aegon’s Health & Wellbeing Service provided by Health Assured, putting you in touch with qualified and experienced counsellors at any time of day.
Legal & General
In 2015, Legal & General won the ‘Life Insurance Provider of the year’ award from the Personal Touch Awards
Up to the age of 50, Legal and General Relevant Life policies offer cover of up to 25 times remuneration, with that cover decreasing to 20 and 15 times if the employee is over 50 and 60 years old, respectively. If the employee leaves the company, Legal & General also allow ownership of the policy to be transferred to the person’s new employer to continue their cover.
Liverpool Victoria is one of the largest providers of insurance products in the UK, with more than 5 million customers across the country.
LV offers a maximum level of cover up to £10 million with guaranteed premiums that will not change during the life of the policy. It also offers several helpful benefits to accompany policies, including legal advice and VAT and tax advice.
Scottish Widows is a highly praised provider of pension and insurance products across the UK with nearly 6 million customers.
Scottish Widows can cover employees for up to £25 million. It also offers optional increasing cover to ensure benefits keep up with inflation and if an employee leaves the company, you and the policy’s trustees can arrange to assign the policy to the employee under their own name.
Zurich owns locations in more than 170 countries and provides insurance products and services on a global scale.
Zurich policies are portable, which means that employees leaving the company can take their Life Cover with them and have the policy continue under their own name. Zurich’s policies also typically cover a sum equal to multiple of the covered employee’s remuneration package, which can include both salary and dividends.
Need Some Expert Advice?
We are here to ensure you, your family and your business don’t miss out on financial security because appropriate insurances were not put in place. Our experts our here to help provide you with the necessary information for you to make an informed decision.
If you need any help please do not hesitate to pop us a call on 02074425880 or email us at firstname.lastname@example.org. If you are still researching then you can use our calculator to compare relevant life cover quotes or have a look at the related guides below.
- We placed over £1 billion worth of risk with insurers for our clients in 2017
- We were nominated for Protection Intermediary of the Year at the Protection Review Awards in 2016, 2017 and 2018 and the Cover Excellence Awards in 2016 and 2017
- Our ethos is to provide the best possible service demonstrated by the growing number of 5-star rated reviews with 98% of our clients saying they would recommend us
- Tom and the rest of our insurance experts are frequently quoted in leading papers such as The Independent and Financial Times with a reputation in the media as an authority in our industry.
by Tom Conner, BSc, MPhil
Director at Drewberry
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