What is Relevant Life Cover?

As an owner of a limited company, a relevant life policy will provide you or your employees with the employee benefit of a cash lump sum paid upon death or diagnosis of a terminal illness to you or the employees family.

The policy is paid for by the business, which can mean a number of advantages compared to a normal personal life insurance policy. Most significantly, it can be tax efficient and result in savings of up to 50% on the premiums, depending on your tax band.

Relevant Life cover can provide a ‘death in service’ benefit to your staff. Meaning the business can offer a benefit which can help attract and retain employees. This may be of interest if you don’t have enough employees to acquire a group life policy, or if you only wish to cover certain people within the business.

By arranging a relevant life policy the payout in the event of death does not form part of the pension lifetime allowance which is the case for many group schemes.

Other advantages of a relevant life policy include:

  • Death benefit usually free of inheritance tax.
  • Sum insured of up to 25 times the life assured’s annual remuneration.
  • Must be written into trust** for the benefit of your chosen beneficiaries, meaning the sum gets paid out much quicker than waiting for probate.

*The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

**Trusts are not regulated by the Financial Conduct Authority

“69% of businesses had never heard of a relevant life plan” [stated in Legal & General’s State of the Nation’s SMEs 2019]

  • What makes a Relevant Life policy tax efficient?

    Firstly from the business’s perspective, there are no National Insurance contributions to pay on the premiums. The company continues to receive corporation tax relief.

    For the employee, there are no National Insurance contributions or income tax on the premiums or benefits throughout the policy.

    Policy type Non-relevant Life Relevant Life
    Monthly premium to insurer £100.00 £100.00
    Employee Income tax (40%) £68.96 None
    Employee NI (2%) £3.45 None
    Total employee earnings needed to fund monthly premium £172.41 £0.00
    Employer NI (2%) £23.79 None
    Gross cost to company £196.20 £100.00
    Corporation tax relief amount (20%) £39.24 £20.00
    Total net premium £156.96 £80.00

    This example creates a saving of £76.96 per month which is 49% cheaper than a non-relevant life policy.

    Please note that the premiums provided are indicative only and based on this specific case study/ example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

How does a Relevant Life policy work?

 

Why do I need to register a Trust for my Relevant Life policy?

All relevant life policies must be written into Trust. This will help ensure:

  • Policy proceeds are ring-fenced from Inheritance Tax.
  • Benefits paid out without having to wait for Probate to be granted.
  • Avoids having to follow the laws of intestacy.
  • You nominate your beneficiaries and trustees.

What happens if the employee leaves the company?

Should the life covered leave the employment of the company, there are 3 options:

1) The policy is cancelled, there are no fees or charges for doing this.

2) 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.

3) The life assured’s new employer takes over the payment of the premiums.

 

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