If you are thinking about offering insurance packages to your employees, you may be wondering ‘what is relevant life insurance? Relevant life insurance is a type of cover that companies can take out that provides life insurance for employees. It works similarly to private life insurance policies with the difference that companies providing it can benefit from tax perks.
Relevant life insurance is different from group life schemes in the sense that it allows employers to offer “death-in-service” benefits to the employee’s family outside of a group cover scheme.
Relevant life insurance typically offers multiples of an employee’s salary, up to a certain maximum (for instance, 20 times their annual salary). However, this figure varies between providers and may depend on the age of the employee. Older employees generally get less cover than younger ones.
What does relevant life insurance cover provide?
Relevant life insurance is a way to give employees a conventional life insurance policy as a benefit of working for your firm. You apply for it directly (instead of workers having to do it themselves) and pay for it out of business funds. The underwriter then writes the insurance policy into a trust.
If the employee dies or becomes terminally ill while working for your organisation, the insurer pays out a lump sum to the trustees. These then distribute funds to the beneficiaries.
To qualify for a terminal illness payout, an employee must have a terminal illness that meets the definitions set out in the life insurance policy during the policy term. In most cases, terminal illnesses are any condition in which registered physicians put a time limit on how long the employee will live (usually 12 months).
When should you get relevant life insurance?
There are two situations in which it makes sense for employers to invest in relevant life cover as a benefit.
The first is when the business does not have a group scheme. If your company does not qualify (because it is too small), but you still want to offer employees cover, you can do it with relevant life insurance. Like group schemes, it is tax efficient.
The second is when employees are nearing their maximum allowances. Relevant life policies don’t contribute to lifetime and annual pension allowances, so such schemes may appeal to employees on high pay.
Are relevant life insurance policies tax efficient?
In terms of employees, HMRC views relevant life premiums as a business expense. It does not usually classify it as a benefit-in-kind, subject to taxation. As such, workers themselves don’t need to pay National Insurance or income tax on any premiums they pay towards their policies. This then reduces the cost of life cover overall.
Relevant life insurance is also tax efficient for businesses since tax authorities again treat policies as allowable expenses. Companies that spend on this type of cover can deduct any costs from their taxable income at the end of the accounting period.
If an employee dies or becomes terminally ill, any payout is separate from the employee’s lifetime pension allowance. This means that beneficiaries won’t have a higher tax burden in the future on pension income.
What are the benefits of relevant life insurance?
Businesses that take out relevant life insurance on behalf of their employees can expect multiple benefits.
Your business may qualify for reductions in relevant life insurance premiums if employees are young or if they have been with you for a long time.
It’s tax efficient
You may be able to save up to 50 per cent in tax on life insurance policies, and you may also be exempted from National Insurance contributions.
It makes employees happy
Providing relevant life insurance shows your employees that you care for their wellbeing and that of their families. By offering it, you may be able to reduce staff turnover.
It gives you flexibility
If workers leave your company, you can still protect them.
Usually, tax authorities do not consider relevant life cover a benefit-in-kind, potentially helping you to reduce your tax bill.
In summary, relevant life insurance is a cost- and tax-efficient way for employers to offer all of the perks of life insurance to their employees, without the need to go on a group scheme. Life insurance policies offer several perks, besides large payouts to beneficiaries, including support, counselling and even medical assistance after a serious or terminal diagnosis. Contact us to find out more.