Updated on: Nov 12, 2023
Imagine protecting your family’s financial future while also saving on taxes and offering yourself an attractive company benefit that avoids any benefit-in-kind tax charges. That’s what relevant life insurance can do for you, and your business. In a world where financial security is more important than ever, relevant life insurance provides a cost-effective and tax-efficient solution tailored to the needs of employees, directors, high earners.
In this blog post, we’ll delve deeper into what relevant life insurance is, its tax advantages, and coverage options. If you are a limited company contractor looking for an effective way to protect your family and save money, relevant life insurance could be the answer you’ve been looking for.
- Relevant Life Insurance provides tax benefits and financial security for families of employees, directors, and high earners.
- It offers cost savings & Inheritance Tax advantages over traditional life insurance policies.
- You should consider coverage options, costs efficiency & independent financial advice when selecting a provider.
Understanding Relevant Life Insurance
Relevant life insurance is a type of life cover provided by the employer, offering tax benefits and protection for its employees and directors. It is a cost-effective solution allowing them to safeguard their families while also benefiting from tax savings.
When a relevant life policy is incorporated into an employee benefits package, the organization becomes more appealing to prospective employees. This helps retain and recognize current employees, demonstrating your commitment to responsible and considerate employment.
And where the firm is a single director limited company contractor, this simply represents a very tax effective type of life insurance policy.
Purpose of relevant life cover
The primary objective of relevant life cover is to ensure financial stability for the families of employees in the event of death or terminal illness. With this coverage, employees’ families receive:
- Financial protection
- Tax efficiency
- Peace of mind
Should a terminal illness or death occur, relevant life cover ensures financial security. It provides a tax-free lump sum if the insured individual is diagnosed with a terminal illness and has less than 12 months to live. This payout can be used to cover medical expenses, replace lost income, or provide financial support for the individual and their family during this difficult time.
The policy is typically written into trust and pays out to trustees for the benefit of the beneficiaries, ensuring that the funds are allocated according to the policyholder’s wishes. Reviewing the terms and conditions of the specific policy is key to fully understand any potential limitations or exclusions.
Differences from traditional life insurance
Relevant life insurance differs from traditional life insurance in several ways. Firstly, relevant life insurance is funded by the employer, whereas traditional life insurance is funded by the individual. This means that employees do not have to pay income tax on the premiums, resulting in significant cost savings compared to traditional life insurance premiums.
Secondly, relevant life insurance offers tax advantages for both the employer and the employee, such as corporation tax relief on premiums, exemption from Benefit in Kind taxation, and inheritance tax savings. These tax benefits make relevant life insurance a more economical option compared to traditional life insurance, providing a valuable benefit for employees and directors.
Who is it suitable for?
A relevant life insurance policy, also known as relevant life plans, is ideal for employees, directors, and high earners who wish to safeguard their families and take advantage of tax savings. Those with a higher salary and larger pension pots, which may be close to their lifetime allowance, may be more suited to relevant life insurance instead of standard death-in-service benefits.
Individuals who are employed or serve as directors of limited companies are a perfect fit for this type of product. If you work through alternative trading structures such as a partnership, or sole trader, you will not likely be eligible for a relevant life plan. For businesses that are too small for a group life scheme, relevant life cover may be an ideal alternative.
Offering relevant life insurance allows employers to provide life insurance for employees and directors, ensuring financial protection and tax efficiency, giving peace of mind to their families.
Tax Advantages of Relevant Life Policies
Relevant life policies offer several tax advantages, enabling employers to provide a cost-effective and tax-efficient benefit for their employees. These tax benefits include corporation tax relief on premiums, exemption from Benefit in Kind taxation, and inheritance tax savings.
Exploring these tax advantages reveals how they can benefit both employers and employees.
Corporation tax relief
Companies can claim 100% corporation tax relief on relevant life policy premiums as an allowable business expense. This tax deduction reduces the company’s corporation tax liability, making relevant life insurance a financially attractive option for limited company contractors.
Benefit in Kind exemption
Employees are not taxed on relevant life policy premiums as a Benefit in Kind, making it a highly attractive employee benefit. The Benefit in Kind exemption in Relevant Life Policies indicates that:
- The premiums paid by the employer for the policy are not considered a benefit in kind or otherwise taxable on the employee.
- This exemption enables the employer to deduct the premiums as a business expense.
- The employee does not have to pay PAYE tax or national insurance contributions on the policy as a benefit.
In essence, the Benefit in Kind exemption provides tax benefits to both the employer and employee, further emphasizing the value of relevant life insurance as an employee benefit.
Inheritance tax savings
Relevant life policies can help with estate planning, as the payout is not part of the estate and can be used to pay inheritance tax bills. Life policies written into a relevant life trust for beneficiaries are able to be exempt from inheritance tax. This is because the payout does not form part of the deceased’s estate.
The current rate of inheritance tax in the UK is 40% (it’s only charged on the part of your estate that’s above the tax-free threshold which is currently £325,000). By using relevant life insurance to provide a tax-free payout to beneficiaries, policyholders can protect their families from the financial burden of inheritance tax.
Eligibility and Coverage Options
Relevant life insurance covers employees, directors, and high earners as the person covered, but not sole traders or equity partners/members. Coverage options include level or increasing cover and total permanent disability options.
Let’s explore the eligibility criteria and coverage options in more detail.
Who can be covered?
Employees, directors, and high earners are eligible for relevant life insurance, while sole traders and equity partners/members are not. To be eligible for relevant life insurance, an employee must be employed by a limited company, partnership, charity, or any other eligible structure. The policy is only able to provide life cover and not disability or critical illness cover. Coverage is typically available until the insured employee’s 75th birthday.
Coverage options for relevant life insurance include level or increasing cover, total permanent disability options, and tailored plans to suit specific requirements. Level cover in relevant life insurance offers a fixed lump sum payout in the event of death or diagnosis of a terminal illness, while increasing cover allows the policyholder to incrementally increase the level of coverage over time.
The total permanent disability option in relevant life insurance provides coverage in the event that the insured becomes totally and permanently disabled. Should the insured meet the criteria for total permanent disability, the policy will pay out a benefit. With these coverage options, employers can tailor relevant life insurance policies to meet the unique needs of their employees and directors.
Implementing a Relevant Life Plan
When it comes to implementing a relevant life plan, selecting the right provider is essential. This section outlines the factors to consider when choosing a relevant life insurance provider, such as:
- Coverage options
- Cost efficiency
- Tax benefits
- The value of independent financial advice
Choosing a provider
When selecting a relevant life insurance provider, consider factors such as coverage options, cost, and the value of independent financial advice. Guaranteed premiums, tax advantages, and additional benefits offered by providers should all be taken into account. Utilising insurance comparison websites is a great way to compare quotes and identify the most cost-effective option.
Considering the tax benefits offered by relevant life insurance providers is also vital. Providers of relevant life cover will be set-up to ensure you get the tax benefits of the cover, but its always useful just to double check with them to ensure the product being offered has all the tax advantages of relevant life cover that we have mentioned above.
Relevant life insurance provides a cost-effective and tax-efficient solution for employees, directors, and high earners to protect their families while benefiting from tax savings. With its unique advantages over traditional life insurance, such as employer-paid premiums, corporation tax relief, Benefit in Kind exemption, and inheritance tax savings, relevant life insurance is an attractive employee benefit that can help your business stand out.
By understanding the eligibility criteria, coverage options, and tax benefits, employers can make informed decisions when implementing a relevant life plan for their employees and directors. Protecting your family’s financial future has never been more important, and relevant life insurance is a powerful tool that can help you achieve that goal.