Relevant life insurance policies provide businesses and employees with a cost-effective form of coverage that provides death-in-service benefits for employees at companies that don’t or can’t have group protection schemes.
If you’re part of a relevant life insurance policy or are considering one for your business, then it’s important to learn how a relevant life insurance policy works to ensure it’s appropriate for you, your business or your employees.
How does a relevant life insurance policy work?
A relevant life insurance policy is a form of insurance that provides coverage over the life of an employee. This type of policy works by providing a lump sum payment to the family of an employee if they die or receive a terminal diagnosis while under the employment of the business.
Relevant life insurance policies are applicable to all employees, including directors, of limited companies. It’s important to check with the insurer that they can offer it to you though, as some companies don’t provide coverage to certain businesses like sole traders.
Who uses relevant life insurance policies?
Generally speaking, relevant life insurance policies are best suited for smaller companies who can’t justify a group scheme. It’s also suitable for those in high-earning positions because it stops any death-in-service benefits from impacting lifetime allowances from pension schemes. It’s also appropriate for employees looking to improve their existing benefits found in their employer’s scheme.
Is a relevant life insurance policy tax efficient?
Relevant life insurance is a great option due to the benefits and premiums it provides. Employees don’t pay any income tax on the benefits they receive and in most cases, they aren’t subject to any form of inheritance tax.
Relevant life plan insurance benefits don’t factor into the lifetime allowance for pensions, which helps avoid paying tax on it. There’s a hard limit of £1,073,100 that can be accrued over a lifetime in pension payments before paying tax. So, adopting a relevant life plan can help high-earning employees by removing them from the group scheme.
There are a few more tax benefits associated with this type of coverage, such as the lack of any National Insurance contributions. As long as the tax inspector deems the premiums as exclusively for the purpose of trade, then it falls under a trading expense. Moreover, the premiums aren’t included in the annual allowance for pension tax.
What are the benefits of relevant life insurance?
Relevant life insurance offers a number of benefits for both companies and employees. It makes the company more appealing to prospective employees as it offers excellent benefits. What’s more, it rewards existing employees and encourages them to stay at the company, helping to retain key talent.
It’s also a useful tool for businesses to help lower their overall tax liability. So in many cases, it’s an affordable option for smaller organisations looking to offer comparable benefits when stacked against larger businesses.
The premiums associated with relevant life insurance is often seen as a business expense, which creates room for it to become a tax deduction. It’s also good for employees as it gives them the opportunity to plan ahead if their estate exceeds the current tax threshold for inheritance.
Who is covered with relevant life insurance?
Relevant life insurance policies tend to cover a variety of individuals in a business, which is why it’s such a versatile option. Generally speaking, it covers:
- Employers who want to offer death-in-service benefits to employees but can’t justify a group scheme due to low employee numbers.
- Directors looking to create their own death-in-service benefits without undertaking a group scheme for all employees.
- High-earners like directors and executives, where a death-in-service benefit might extend their lifetime allowance beyond the threshold otherwise.
- It’s worth noting that relevant life insurance isn’t always available if there isn’t a real employer-employee relationship. This includes sole traders, partnerships or those in a Limited Liability Partnership.
Relevant life insurance is a unique form of coverage that has the potential to offer many benefits to both employers and employees. If you’d like to know more about this type of insurance, or require assistance selecting the most appropriate coverage for you, contact us today at WIS Business Protection for more information.