Relevant Life Insurance
Published 16th August 2017
Relevant life is one of the most frequently arranged business insurance policies, with employers looking to offer their employees death in service benefits in the most tax efficient way possible.
There is a lot of content online that seems outdated or incorrect when discussing business protection policies, so below is a breakdown of areas we are commonly asked about.
It is important that any insurance policy you take out is suitable for your circumstances - The Information in this article does not constitute financial advice as it is not tailored to you or your company’s needs, as such we always advise that you consult with a professional. To speak someone about your business needs, make an enquiry and we will pass you to one of the experts.
What is relevant life cover?
Relevant life cover definition Relevant life insurance provides a lump sum pay-out upon the death or terminal illness diagnoses of a company employee and/or its directors, to the benefit of whoever is insured (and their family). The key distinction between relevant life cover and a straightforward life insurance policy is that premiums are paid for by the company, and can be written off as a taxable expense. It is important to make the distinction between this and other types of business protection, because relevant life plans are designed to pay to the individual, rather than to the benefit of the company. The employer is the policy owner, but the individual and their family are always named as the beneficiaries.
Relevant life cover definition
Relevant life insurance provides a lump sum pay-out upon the death or terminal illness diagnoses of a company employee and/or its directors, to the benefit of whoever is insured (and their family). The key distinction between relevant life cover and a straightforward life insurance policy is that premiums are paid for by the company, and can be written off as a taxable expense. It is important to make the distinction between this and other types of business protection, because relevant life plans are designed to pay to the individual, rather than to the benefit of the company. The employer is the policy owner, but the individual and their family are always named as the beneficiaries.
Relevant Life key features
Who benefits from relevant life cover?
Relevant life cover is typically taken out by directors of businesses for themselves and for their employees, where it is inappropriate to arrange a group life insurance policy (for example if the number of individuals is too few to warrant a group plan):
- Employees - where the employer wants to offer their staff a death in service benefit.
- Directors - where they wish to protect their own lives in a tax efficient way.
- High earning employees / directors who want cover outside of their lifetime allowance (see below for more info).
Lifetime allowance - Pensions attract tax relief. However, the introduction of the ‘lifetime allowance’ has capped tax free pension savings of £1.25 million for tax year 2014/15, and anything exceeding this amount is subject to 55% tax. Where a pay-out on a registered group life insurance scheme may fall under pension legislation and thus be subject to tax if the lifetime allowance is exceeded, relevant life policy pay-outs are not counted toward an individual’s lifetime allowance, thus avoiding any over-threshold tax. More info on the lifetime allowance can be found at the official UK government website here.
Relevant Life Policies and the HMRC
Relevant life company benefits
When the employer pays the monthly premiums they are considered a taxable expense by HMRC, so essentially, employers can offer employees a death in service package at a reduced rate.
Relevant life employee benefits
- They do not affect the annual allowance of the beneficiary with regards to registered pension schemes.
- They are also not assessable for NI contributions.
- No income tax is paid by the beneficiaries upon payment of the lump sum, upon death it is generally considered to be free of inheritance tax because the policy is held ‘in trust’ and doesn’t form part of the employee’s estate.
- A Relevant Life Policy is paid for by the employer and is not considered to be a benefit in kind for tax purposes and are, therefore, not subject to income tax and do not normally form part of employee national insurance contributions.
How much relevant life cover is appropriate?
Establishing the right level of cover is important. Typically, the term of the insurance; the sum assured; and whether the policy I linked with inflation; are decided upon by the business paying for it.
Many companies will protect employees in terms of salary multiples, generally trying to cover beneficiaries (households) for lost salary until retirement (where affordable). So, for someone with 10 years to retirement earns £30k a year, then in an ideal world the cover would be for 30 x 10 = £300k. Of course premiums may well be higher for those older and closer to retirement, so affordability is often a limiting factor on the total benefit.
The insurers themselves may also set limitations on the appropriate levels of cover depending on the age and income of an employee – naturally, a 50 year old earning £25k a year would not take a policy for millions of pounds worth of cover.
Calculating the savings
When using some of the calculator tools available, advisors will be able to establish the approximate savings you can make on the monthly cost of insurance when compared to non-relevant life insurance policies paid out of earned income, however it is always recommended you consult an accountant or qualified tax official for advice.
Typically, a higher-rate earner can save up to 49% by using a relevant life plan, where basic-rate earners can save roughly 36%.
The below example outlines the potential savings in the following scenario:
- Monthly premium of £50 per month,
- The employee is subject to a 20% tax rate,
- The employee’s national insurance rate is 2%,
- The company’s corporation tax is 20%,
- The employers national insurance rate is 13.8%.
In this example, because non-relevant life policies are paid from earned income (net of NI and tax) the gross pre-tax income required by the employee to pay for the policy is actually £64.10. On that income, the employer will have made NI contributions of £8.85, and then deducted the expense from corporation tax of £14.59pm - meaning the total adjusted cost of a £50pm policy to employer and employee, would be £58.36pm. If a relevant life policy then the adjusted cost is approx. £40pm.
Therefore a saving of £18.36, which is 31.46%. For a detailed breakdown of the savings your can make, get in touch and we’ll pass you to one of the expert advisors.
Limitations to relevant life cover
With the savings outlined above - why don’t more people take relevant life policies? One of the main reasons is that most employers haven’t heard of them before! But there are certain limitations with relevant life policies:
- Relevant life policies can only be taken out where there is an employer/employee relationship. Sole traders, for example, are unable to take out a relevant life policy.
- Only the protected individual can receive any pay-out from the policy, not the employer, so relevant life cannot be used to provide key person cover.
- The main purpose of a relevant life policy must not be tax avoidance for the employer or the beneficiary.
- Relevant life policies are life protection only - No critical illness benefits are included.
- Policies can only be paid out upon death before the age of 75.
- Policies can only be paid out to an individual (or sometimes a charity depending on beneficiaries stated on the policy).
- The individual can name beneficiaries, but ultimately the trustees decide where funds end up.
- There can be no surrender value for the product (pure protection – no investment elements).
The history of Relevant Life cover
Bright Grey relevant life cover
The relevant life policy was initially pioneered by an insurer called Bright Grey. Before that, the majority of business owners had life insurance either personally through pre-taxed income or through the business, being subject to benefit in kind tax. Having a company pay for personal life insurance was only possible with group life insurance policies, where there was usually a minimum number of employees per policy, and many businesses didn’t want or need to insure that many of its staff.
After Bright Grey launched its relevant life policy, directors were able to take advantage of pension legislation which allowed no benefit-in-kind issues to effect individuals. This was due, in part, because the policy was set up in trust.
Other relevant life providers
After Bright Grey pioneered the policy, other providers slowly emerged creating competition and helping to keep premiums low. There are now many other providers, including but not limited to: Zurich, Legal & General, Friends Life, PruProtect, LV=, AEGON, UNUM, and Scottish Provident. All polocies can differ slightly in setup and price, as can the underwriting at the time of application –Some restrict cover for certain pre-existing medical conditions where others are more flexible, some restrict certain occupation types where others are more flexible. As such, deciding which company can offer the best policy for you and your employees is an important part of the process, so consulting a whole of market specialist can be crucial.
Relevant life insurance for Self Employed sole traders and Partnerships
If you’re wondering if you can take out a relevant life policy as a self-employed individual the answer is generally no. Relevant life is only available when there is an employer/employee relationship and they are on a salary by the company. Feel free to get in touch with us and we will pass you through to a qualified adviser who can assess your circumstances . This also applies to partnerships as it depends what type of partnership it is.
Relevant Life policies for contractors
IT contractors working through their own limited companies. With spouses that re also directors of the company, cover can be arranged for both. There are many other types of contractors that can benefit as well as long as the work is done through their own limited companies. Large businesses may also take advantage if they’re looking to take out policies for a few specific employees.
Relevant life insurance quotes
To get a quote and to find out who the best insurer for you may be, make an enquiry below and we will pass you to one of the specialists...