Relevant Life Insurance

Let The tax man pay for your life insurance

What is Relevant Life Insurance?

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:

The business takes out a policy on an employee, owner/director, or partner
Premiums are paid by the business and count as a deductible business expense
The policy pays out tax-free to the employee’s beneficiaries if they die
There is no tax charge on the premiums or the benefit amount.
Benefits provided do not count towards the pension lifetime allowance.

It’s a win-win allowing businesses to offer a valuable benefit at a minimal cost.

Benefits Of Relevant Life Insurance

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.

In Short 5 Benefits of a Relevant Life Plan Are:

Tax efficiency: Relevant Life insurance premiums are considered a business expense and are not a taxable P11D benefit-in-kind.
Cost: A Relevant Life policy can be less expensive than a personal term life policy, especially for high earners, because it’s paid for by the company and not out of an employee’s already taxed income & national insurance contributions.
Flexibility: The cover under a relevant life policy can be adjusted to meet the changing needs of the employee, the company, and its circumstances.
Beneficiary flexibility: The death benefit from a relevant life policy can be paid directly to the employee’s beneficiaries via a discretionary trust, bypassing the probate process and potentially reducing the burden of estate taxes.
A Relevant Life Plan does not impact an individual’s pension lifetime allowance.

Who Is Eligible For This Kind Of Policy?

The business must be a registered company – this includes limited companies and LLPs (Limited Liability Partnership).
Both trading companies like retailers and professional services firms qualify.
The insured person needs to be an employee or company owner, like a director.
Micro businesses with fewer than 10 employees are the prime target market, but larger companies can utilise it too.
There are no restrictions on specific industries – any incorporated business, regardless of sector, can apply for and offer relevant life insurance.
Startups under 2 years old may need to provide financials showing they are an established trading business.
The life assured (person covered) must be under 64 years old when taking out the policy and no more than 75 when it expires.

Sole traders and partnerships without company structure, unfortunately, can not take out relevant life cover.

What Is The Cost Of Relevant Life Insurance?

The cost of relevant life cover in the UK can vary based on factors like:

The age of the insured employee or business owner – premiums rise as age increases.
Their health and lifestyle – poor health or hazardous activities mean higher premiums.
The cover amount – policies with a higher lump sum benefit will have larger premiums.
Policy term – permanent “whole life” policies are more expensive long-term.
Insurer underwriting – some may charge higher rates for relevant life policies based on risk factors.

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.

What Happens When There is a Claim?

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:

The Member
Any Spouse, Civil Partner, Widow, Widower or surviving Civil Partner of the Member
The Children, Grandchildren, Great Grandchildren (and the Spouse or Civil Partner of any of these) of the Member
The brothers and sisters of the Member and their Children, Grandchildren or Great Grandchildren

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.

Tax Benefits Of Relevant Life Insurance

Benefits for the Employee:

Tax-Free Payout: The beneficiary (employee’s family) receives the life insurance payout tax-free.
No National Insurance Contributions: Employees don’t pay income tax or National Insurance on the premiums.
Potential Inheritance Tax Savings: The payout is usually not subject to inheritance tax, reducing the tax burden on the family.

Benefits for the Business:

Tax Deductible Premiums: Premiums are typically treated as a business expense for tax relief, reducing the company’s taxable profits and helping with corporation tax relief.
Attractive Employee Benefit: Offering relevant life insurance can be an enticing perk to attract and retain valuable employees.
No Employer National Insurance Contributions: The company doesn’t have to pay employer’s National Insurance on premiums, saving on employment costs.

For more information on the taxation of relevant life insurance go here.

The Different Options Of A Relevant Life Plan

There are a few variations when it comes to relevant life cover.

Level Term – A level term policy provides a death benefit for a specified period of time, usually ranging from 10 to 30 years. The death benefit remains constant throughout the term of the policy, hence the term “level”. This means that if the person covered dies during the term, the beneficiaries will receive the same predetermined amount of money, regardless of when the death occurs.
Decreasing Term – A decreasing term policy is a type of life insurance that provides a death benefit that decreases over time. This type of policy is often used to cover a decreasing debt or obligation, such as a mortgage. The premium for a decreasing term life insurance policy is generally lower than for a level term policy.
Increasing Term or Index Linked – An increasing term policy that is index-linked is insurance that provides a death benefit that increases over time, tied to an index such as the Consumer Price Index (CPI). The death benefit is adjusted periodically to keep pace with inflation, providing greater protection for beneficiaries over time. The premium for an index-linked policy is generally higher than for a level term policy, as the death benefit increases over time.

Frequently Asked Questions

How Long Does A Relevant Life Insurance Policy Last?

It’s really up to the individual business to decide how long a relevant life policy should be. Normally they will be taken out over a minimum of 5 to 10 years. However, most companies will offer cover to their employees up to retirement age. A relevant life plan can be taken out up to a maximum age of 75.

Can I Change My Relevant Life Plan To a Personal Cover?

Sometimes companies close or employees leave. Relevant life does give some flexibility here. You can change your policy into personal life insurance or over to another company. This is carried out using a deed of assignment.

Are Dependents Covered Under Relevant Life Plans?

The answer is no. Only employees of the business will be eligible for cover under a relevant life policy.

Is There A Waiting Period For Claims?

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.

Do I Need To Provide Medical Evidence?

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.

Does It Cover Critical illness?

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.