Relevant Life cover -How to tax efficiently provide your life insurance cover through your company
Monday 15th August, 2022
Many small business owners sink blood, sweat and tears into their business. All their dreams and future goals for themselves and their loved ones are often inextricably linked to the success of their business venture. Often they are the main bread-winner, with their partner staying home and looking after the family. When they succeed, it is the culmination of years of effort and stress, but the rewards are so sweet.
However, what happens if the unforeseen happens? What happens to your family and all the resources and effort that have been sunk into the business if the adventurous business owner dies? Do all their dreams and ambitions for their loved ones die with them?
In this article, I will discuss how to protect against such an event, using your business to provide the protection your family needs. Furthermore, I will show how this can be in a manner that can be far more cost effective and tax efficient than if you were to pay for the life insurance your self.
As part of my job as a financial planner, I have to consider every eventuality. The least pleasant of these is considering the impact of the sudden death of one of my clients on their family. I help my clients to consider the overall effect of the loss of income, the bereavement, the time it will take the surviving spouse and children to recover. Will their daughter still be able to go to university? Will she want to if she perceives this as creating a massive drain on her remaining parent. Will the remaining parent have to give up their job or change the way they work in order to be available for the children? Will their partner have to sell the house, as they cannot afford the mortgage? Will there be enough money to help the children have a sound financial start in the future?
These conversations can be really difficult, and can cause distress if the person has little provision in place. However, the hard edge of these discussions is often softened by the existence of one thing: death-in -service protection provided by the person’s employer. Most larger employers these days provide generous multiples from 4 up to 10 times salary, as life cover for their employees. This means that even if an employee is on a relatively low salary of £20,000, their surviving partner can look forward to approximately £80,000 (tax free) should they die.
Thanks to these death-in-service schemes, even the most financially unprepared employee is generally in a position that makes provision for at least some sort of legacy for their family. Now death-in-service is not the cure all for the considerable lack of life insurance provision that most working age adults suffer from; but it is definitely a start.
These larger companies generally use a group life scheme to provide all the cover. This is set up subject to pension legislation and is a cost effective and simple way to provide protection to their employees. The death-in-service is not treated as a benefit in kind, and the company can offset the premiums paid to the life insurance company as a business expense. Overall, this seems like a win for both the company and for the employees.
However, most group scheme providers require at least 5 members. This means that, if you are a small business with relatively few employees, you cannot provide this kind of life insurance for your staff. Does this mean that there is no option available for small companies to provide for their directors and other employees?
Relevant Life Insurance
Fortunately, for all those one-man limited companies and smaller operations, there is a really useful and easy to use solution. This comes in the form of Relevant Life Insurance.
In a nutshell, a relevant life policy is a single life, stand-alone, death-in-service, life insurance policy that is held in trust for the benefit of an employees’ or directors’ loved ones and financial dependents.
That is a bit of a mouth-full, so let’s break it down a bit. It is a single life policy, which means that the policy can only be written on a single life, rather than a joint life basis. This makes sense, as the policy is based on the life of the specific employee. Stand alone, merely refers to the fact that each employee has their own policy and trust, as opposed to a group scheme which covers all employees within the single scheme. Death-in-service refers to the fact that it is provided and paid for by the employer.
The life insurance policy is written in a discretionary trust, which then ring fences the proceeds of the policy for the selected dependents/loved ones and ensures that the proceeds of the policy become quickly available to the beneficiaries and do not fall into the deceased’s estate and then subject to probate and Inheritance Tax.
Using this type of policy, a small limited company, partnership, charity or sole trader can provide life insurance cover for their directors and employees, without the concern that they do not have enough employees to meet a minimum requirement.
It is also important to note that, unlike group life schemes, Relevant Life policies are non-registered, so they do not fall under pension legislation. This is very important, as it means that the proceeds of the policy will not be included in the pension lifetime allowance calculation, like the proceeds from a group scheme would be.
What are the advantages of using Relevant Life Insurance?
- The benefits are paid into a trust that ring fences the proceeds for the benefit of selected beneficiaries and ensures that the assets do not form part of the deceased’s estate. It also ensures that payment of the benefits is not delayed by probate.
- If the employee changes jobs, they can always take over the Relevant Life policy from the employer, and can even ask their next employer if they would be happy to pay the premiums.
- The premiums paid by the employer are not treated as a benefit in kind to the employee, and therefore does not create any additional tax liabilities for them.
- Neither the employer or employee are subject to National Insurance on the premiums.
- The premiums paid can be treated like a business expense and therefore offset against any corporation tax. This means that providing Relevant Life Insurance for employees can be very tax efficient. This tax efficiency can be demonstrated by the table below from Royal London.
Requirements for setting up a Relevant Life Policy
- The first requirement, as highlighted above, is that it must be a single life policy. There cannot be joint lives assured.
- The policy should only provide life cover and should not make provision for other benefits. Now, there are plans that provide critical illness cover as part of the plan, however it remains to be seen how HMRC will treat these policies, when assessing the qualification of the plan as a Relevant Life policy.
- It can only pay out a lump sum when the employee/director dies in service before the age of 75.
- It can’t have a surrender value. In the past, many life insurance policies had an investment element built in. This meant that the policy would build up an amount in investments that could be surrendered and taken in the future. Alternatively, the investment returns could be used to keep the premiums of the policy down. These have become far less common, but it is important to note that a policy will not qualify as a Relevant Life plan if it has an investment element.
- The policy can only pay out to an individual or a charity.
- This type of policy should not be used as a scheme to avoid tax.
As you can see, Relevant Life policies can provide a simple, tax efficient solution to small companies, partnerships and one-man bands looking to provide life insurance to their directors and employees.
If you would like to discuss this further, please book a free initial consultation with us through our website, emailing us, or by phoning on 01420 446777.