Relevant Life Insurance
Did you know your company can now setup life insurance for you and pay the premiums too? Even better, this is an allowable business expense!
If an employee dies while working for the company, that employee’s beneficiaries such as the spouse, kids, or other family members will receive a lump sum payment. Whilst this is offered primarily as a benefit to employees and directors, the business also benefits as the policy can be offset for corporation tax. Whether you are a business owner, company director or a contractor, a Relevant Life policy offers very tax-efficient life insurance.
The Relevant Life policy requires the employer to provide a trust for the benefit of the employee’s family. This will help to complete all legal requirements for a Relevant Life policy and also in most cases, it should help to alleviate inheritance tax.
Who can have a relevant life policy?
Employees of a company registered in the UK are eligible for a relevant life insurance, provided they have an employment contract. If you are a one-person company or an employee seeking life coverage without contributing to your individual tax-free lifetime pension allowance, relevant life insurance may provide an ideal solution.
The policy payout will go to the employee.
Is Relevant Life Insurance tax deductible?
Relevant life insurance is a tax-efficient solution, and the employer as well as the employee usually get tax benefits. It is not treated as a P11d benefit. Given the premiums are paid ‘wholly and exclusively for the purposes of the business’, Relevant life insurance is often allowed for corporation tax, and normally there are no National Insurance contributions to pay on policy payments.
The employee will not pay income tax on the value of the premiums, and usually the payout is free of income tax. The payout will also be treated as separate to the employee’s estate for inheritance tax purposes.
How much can you save?
Let us now see how the cost of your life insurance policy shifts. It moves from your pocket to your company expenses and the taxman.
Let us assume that you own your own company. You pay £100 a month and choose to pay for Life Insurance out of your pocket. It will cost your business more than it should. To begin with, if you are a 40% taxpayer, you need to consider you have already paid tax on the £100 in the form of income tax and employer and employee NI contributions. In fact, after 19% Corporation Tax (CT) relief, the net cost to your business works out at £158.93 per month.
Instead, by having a Relevant Life Insurance policy, you do not pay any NI contributions or income tax on the premiums. However, you still receive a 19% CT relief. In turn, this makes the net cost only £81 per month.
That is a huge saving of £77.93 a month. This saving equates to £935.16 over the year.
Types of Covers?
Decreasing Term Life Cover
Decreasing life cover policy is a good way of ensuring your mortgage repayments are met in case of death. Any debt that is gradually reducing may be covered by a policy of a decreasing term. It keeps track of your repayment schedule, with payout levels falling in line with your debt’s diminishing size.
Level Term Life Cover
Level Life cover provides a cash lump sum if you die in the course of your lifetime, which can be used to repay debts or simply as a way to help life carry on without your help.
Increasing Term Life Cover
Increasing Life cover has premiums that rise every year, but the payout also rises to mitigate the impact of inflation, making sure its value at the time of your death is the same as it would be now.
What happens if the employee leaves the company?
Should the life covered leave the employment of the company, there are 3 options:
- The policy is cancelled, there are no fees or charges for doing this.
- The employee takes over the payment of premiums resulting in the policy becoming a normal personal life insurance. The existing trust agreement ceases, and the future tax savings will no longer apply. In this instance, the terminal illness benefit is removed.
- The life assured’s new employer takes over the payment of the premiums.
What type of costs should Relevant Life Insurance cover?
- Mortgage outstanding
- The cost of raising the child or children of the employee
- School and university fees
- The cost of living for the employee’s partner
- Funeral costs
It is up to the recipient to spend the lump sum as they see fit, but normally it would be used for costs
such as those mentioned above.
It is a legal requirement that all policies relating to Relevant Life be written into a discretionary trust, as any payout must go to an individual or charity. This means that any payout will not be added to your estate, and therefore not liable for inheritance tax (IHT).
Since the policy is in trust, it also means that beneficiaries will get the money much quicker as they can bypass probate, which can take several months.
When a discretionary trust is set up, the employee will name all the people that may want to benefit from it in the future. They will also name the Trustees who will be the legal owners of the trust fund and responsible for distributing any payout or managing the trust fund if, for example, the beneficiaries are children and too young to manage themselves.
How much does it cost?
How much pay will depend on how much cover is needed for each employee, their age, lifestyle, and any health conditions they may have. The more coverage you want, the greater the cost. Variables include:
- Your age
- Your health
- Your lifestyle
- Whether you smoke
- The length of the policy
- The amount of cover
Why do you need to take our expert advice?
With the absolute clutter of information available out there in the market, We’re sure you’re quite confused. Don’t fret. We will help you understand, evaluate and decide the Life Insurance cover that’s right for you and your family!