What is relevant life insurance?
A type of life insurance policy for an individual employee, including the owner of the business (but not for anyone who is taxed as self-employed).
Monthly premiums are paid by the company and the policy is set up under a discretionary trust which will pay a lump sum to the beneficiaries if the employee dies while employed.
As premiums are paid for by the company, premium payments are usually viewed as an allowable business expense by HMRC, resulting in a tax saving.
What’s the advantage of relevant life insurance to me?
Taking out a relevant life policy is a clever way to buy life insurance as HMRC doesn’t consider it as a benefit-in-kind so you won’t have to pay any income tax or National Insurance on the premiums.
This can give significant savings over the term of the policy, especially for higher rate taxpayers.
Tax efficiency for the company and beneficiaries
So long as HMRC deems the insurance premiums as wholly and exclusively for the purpose of trade, they are regarded as part of the employee’s remuneration package which as well as cash includes other benefits, such as death-in-service or pension.
The company can offset the cost against its Corporation Tax bill, as an allowable business expense.
The employee (often a director) does not need to pay for cover out of his/her post-tax income. This will result in a significant saving compared to the cost of buying personal life insurance.
This type of policy is also tax efficient for the beneficiaries as any pay-out in the future will not be subject to income tax or inheritance tax.
Also, any pay-out will not count towards the employee’s lifetime pension allowance so the beneficiaries will not be required to pay tax when they make a claim on the employee’s policy.
Who is it suitable for?
Relevant life insurance may be suitable for the following:
Those companies that don’t run a group life scheme but wish to provide insurance for individuals.
Employees aged between 17 and 71 (pay-outs apply up to age 75) when the policy is taken out. This can include sole directors of a limited company such as IT contractors and management consultants.
Businesses that want to provide higher earners with additional life insurance that doesn’t count towards annual or lifetime pension allowance.
Individuals who want the company to top up any benefits they get from an existing group life scheme which typically only covers 4 x annual salary – relevant life insurance can cover up to 30 x salary, depending on the age of the individual.
What happens if I leave the company?
If you leave the company, the policy can be transferred to a new employer provided they are happy to continue paying the annual premium.
A new discretionary trust will have to be set up, with the new employer becoming a trustee.
The policy can also be transferred into your name alone and you would be responsible for paying the premiums.
Before exercising this option, you should speak to a financial advisor or your accountant as you may no longer qualify for the same level of tax benefit.
Other conditions may also apply. Any transfer of a relevant life policy must be completed within 90 days of you leaving your previous employer.
We will be happy to discuss your individual circumstances to see if Relevant Life Insurance is suitable to your protection needs.