Relevant life insurance or director’s life insurance as it is sometimes called is a way for small businesses to provide life cover for employees much like death-in-service benefits or a group life scheme offered by larger corporations.
With relevant life cover:
It’s a win-win allowing businesses to offer a valuable benefit at a minimal cost.
Relevant life insurance provides an array of benefits for employees, company directors and their families. The major benefit being that it is tax-efficient. The premiums are paid by the employer and are an allowable business expense, meaning that there is no extra tax burden on the employee. This also helps to reduce overall company costs as employers do not have to pay any income tax or National Insurance contributions on the premiums they pay. Additionally, any benefits paid out are currently exempt from inheritance tax as they are paid via a discresionary trust.
The policy can be designed in such a way that it pays out a lump sum upon death or diagnosis of a serious illness, or provides a regular income should either event occur. This means that employees and their families can feel secure in knowing that their financial security will be taken care of in times of difficulty.
Sole traders and partnerships without company structure, unfortunately, can not take out relevant life cover.
The cost of relevant life cover in the UK can vary based on factors like:
Relevant life insurance generally costs the same or only marginally more than comparable personal policies. The tax savings tend to greatly outweigh small premium differences.
When the life assured passes away, their beneficiaries will receive a lump sum from the insurer which is equal to the sum insured. A claim will be made by the trustee who will need to document evidence of the person’s passing, normally with a death certificate. A claim can also be made for terminal illness by the life assured themselves. However, the money would then form part of the estate and would therefore be subject to inheritance tax if the thresholds are met. There are options to retain the benefit within the trust if a person thinks this could be an issue.
All Relevant Life policies are set up in a relevant life trust which is normally a discretionary trust. The life assured will have named the trustees at the time of application. It is therefore the trustee’s job to deal with the claim. The trustees are the ones responsible for making sure the lump sum benefit is paid to the beneficiaries.
Beneficiaries are normally automatically in the following order:
It is also possible to name specific beneficiaries individually and also set the percentage amount of lump sum benefit paid to each one. Payment of the lump sum via a trust means the benefit doesn’t form part of the estate for inheritance tax purposes.
Benefits for the Employee:
Benefits for the Business:
For more information on the taxation of relevant life insurance go here.
There are a few variations when it comes to relevant life cover.
Generally speaking, the answer is yes – there usually is a waiting period before a claim can be filed with relevant life insurance policies. This period can range from several weeks to several months, depending on the insurer and their specific terms and conditions. In some cases, this waiting period may even be longer than that of traditional life insurance policies.
It’s wise for those considering taking out relevant life insurance to research different providers and policies to find out exactly what kind of coverage they offer and what kind of waiting period applies before filing a claim. By doing so, they will have a better understanding of how their chosen policy works and how best to protect themselves in case something unexpected happens.
When it comes to taking out a relevant life insurance policy, one of the most important questions to ask is whether or not you need to provide medical evidence. After all, this is key in determining your eligibility and the terms of your coverage.
The answer to this question can vary depending on the insurer and the type of policy you’re taking out. Generally speaking, those who take out Relevant Life Insurance will always need to be underwritten the same as any other life insurance policy.
Depending on the cover the provider may request additional information during their underwriting process—such as an examination from a doctor or a GP report.
Critical illness is not normally covered as a benefit through relevant life insurance. This is due to the tax implications and qualifying as a relevant life policy. However, Aviva claims to have HMRC go ahead for relevant life insurance with their “Aviva relevant life with significant illness“. So in fact it is possible to have a version of critical illness with relevant life although it’s important to make sure you understand the differences as it may be much harder to make a claim.