Relevant Life Cover - Tax efficient Life Insurance policy
Life Insurance Policy for Small Business Employee
The concept of life insurance is by no means a 21st century development. The earliest forms can be traced back to Greek and Roman times. Clubs would be formed and, for a regular contribution, a lump sum would be paid in the event of death of an individual. In today’s society, we are expected to insure for virtually everything and anything.
Getting a Life Insurance cover that is paid by your employers is the ideal way forward. However, when you move jobs, you automatically forfeit any life cover leaving your dependants exposed in the event that something should happen to you. To give your loved ones a financial safety net, you’ve probably considered a traditional life insurance policy. Or perhaps, you have already taken out a life insurance policy with your personal finances and you are paying the premiums from your post deductable salary.
The Relevant Life Cover is a great answer for individuals and freelancers looking for all-round protection to safeguard their future, while saving significantly in taxes for both the employee and employer. The premiums of a Relevant Life Cover are paid by the employer, before taxes are applied. And unlike other Life Insurance covers that are paid by the employer, the Relevant Tax Cover can be continued under new employment or transferred to another Insurance policy .
What is Relevant Life Cover
Relevant Life is a life insurance policy available to employers to provide specific employees with life cover in case of death while in service. In the event that an employee dies during a policy term or is diagnosed with a terminal illness during the policy term, the employee’s family will get a cash lump sum.
The premiums are paid by the employer after deducting from the income of the employee in a tax efficient manner. Relevant life Covers can save employers up to 50% tax when compared to an ordinary life policy.
The relevant life cover is identical to life insurance except in two primary features:
- The employer takes out the policy
- Both the employer and the employee enjoy huge tax saving for every premium paid
Who is Relevant Life Policy For
Relevant Life Policy is ideal for small businesses that cannot afford the group life insurance, that require a minimum of 10 or more employees. It is also observed that these companies have a higher propensity to retain valuable resources by offering attractive benefits that are also tax efficient.
The Relevant Life Policy Primarily Aims Giving Benefits For These Three Groups:
1. Significant employees - The Relevant Life Cover is great at the individual levels of cover which makes it ideal for attracting and retaining high-calibre employees by offering them attractive benefits packages that offer tax relief.
2. High income earners – The Relevant Life Cover’s ‘death in service’ does not include their Lifetime Allowance of £1.25 million, where tax is charged at 55%.
3. Company directors – The Relevant Life Cover provides Company Directors valuable tax benefits if their life insurance premiums are paid by the company.
NOTE: A person paying a higher tax rate can save up to 50% by paying for their personal life insurance via a relevant life plan.
Key Benefits and Relevant Life Cover
Besides considerable tax relief, Relevant Life Cover has multiple benefits for the employer and the employee in question.
- An option to put together up to 25 individual policies under one plan.
- The cover can be transferred to the employee in the event of exit from the company; this is done without requiring additional underwriting.
- Terminal Illness Cover is complimentarily included in the Life Cover at no extra cost.
- Besides having considerable tax saving benefits, Relevant Life Cover is free on any tax liabilities for inheritance tax and income come. Should the employee suffer an untimely death the dependants will receive the entire policy pay-out.
- Family dependants receive up to 25 times the combined income from salary and dividends as a cash lump sum in your demise.
Tax Benefits under Relevant Life Cover
As discussed earlier Relevant Life Covers holds tax benefits for both the employer and employee.
- As long as the premiums are exclusively for the business the employer will get Corporation tax relief .
- The employer will no longer be liable to National Insurance contributions on policy payments for Relevant Life cover.
- The employee will not be liable to pay National Insurance contributions on the policy payments for Relevant Life cover.
- The policy payments won’t be taxed as a benefit in kind.
- Policy payments won’t be count as annual or lifetime pension allowances which are taxed at 51%.
Tax Savings: Relevant Life Cover vs. Personal Life Insurance
|Cost to Employee||Monthly Premium||£98.32||£ N/A|
|Employee National||£3.39||£ N/A|
|Employee Income Tax||£67.81||£ N/A|
|Cost to Employers||Monthly Premium||£ N/A||£98.32|
|Employer National||£23.39||£ N/A|
|Total Gross Cost||£192.91||£98.32|
|Less Corporation Tax Relief||£38.58||£19.66|
|Tax adjusted Total Cost||£154.33||£154.33|
|Total saving with a LV= Relevant Life Cover Plan||£75.67|
|A saving of||49%|
*RLC = Relevant Life Cover
*PLI = Personal Life Insurance
**Sampling undertaken for higher income earning employee.
Relevant Life Cover at the End of Employment
If the employment of an insured individual ends, then there are three options that he/she can choose from:
1. Continue the Life Cover
The employee can continue to hold the Relevant Life Cover if the new employer agrees to appropriate responsibilities of the Life Cover. In which case, the new employer then because legally responsible for paying the premiums and replaces you as the trustee. For this exchange to take place a formal document needs to be put in place.
2. Transfer the Life Cover
The company trustees can transfer the policy over to the employee in his/her own name. The Relevant Life Cover in which case ceases to exist and is converted into a Personal Life Insurance. The employee then loses the cover for terminal illness and there will be additional tax implications that would normally apply on all Personal Life Insurance. Check table above.
3. Cancel the Life Cover
If the employee doesn’t seem interested to continue the Life Cover, the e trustees can cancel the policy. The policy would end and the premiums would thereafter stop.
Note: In the event that a trustee decides to stop making premium payments, the cover automatically stops and there is not surrender value.
Risks Involved With Relevant Life Cover
There are certain risks involved that one should be aware of in-order to make an informed decision.
These Risks Could Potentially Change The Outcome A Relevant Policy Cover.
- If a trustee for any reasons stops paying the premiums, the policy will automatically be cancelled. No further refunds will be granted.
- There are various factors that can impact the favourable tax benefits, this include when the policy is not incorporated in trust. In such cases, the Relevant Life Cover will be treated as an ordinary Life Policy.
- Tax legislations are liable to change, so there is no surety that favourable tax laws that apply today will apply in all cases.
Maximum and Minimum Life Cover Limits
The maximum amount that an employee can be covered under the Relevant Life Plans for a non-increasing policy is £25,000,000; whereas the minimum cover is £25,000. The amount of pay-out is generally calculated as a multiple of the employee’s salary and the age when the policy was initiated. The minimum time that a policy can be taken for is 1 year; whereas the maximum term depends on the age of the employee.
Note: The cover automatically stops when an employee reaches the age of 75.
|Up to age 35||30 times salary|
|Ages 36-45||25 times salary|
|Ages 46-55||20 times salary|
|Ages 56-60||15 times salary|
|Ages 61 and over||10 times salary|
Note: The calculation of yearly salaries can include regular bonuses, commission, overtime and other benefits.
Optional Addons With Relevant Life Cover
For increased security and added tax benefits some added feature can be added to the Relevant Life Cover.
- Increasing Cover
To safeguard against future inflation, Increasing Cover addons are set up to automatically increases the cover amount to match with Retail Prices Index (RPI). These adjustments are made every year and increase differences between 2%-10%. In order to opt for this addon, its mandatory to choose this feature at the start of the policy.
Note: This feature will incur a rise in the amount of the premium depending on the increase or decrease of Market Price Index. At times this difference can be quite substantial.
Guaranteed Insurability Feature
This option lets the insured person increase their sum assured during the term of the policy. This feature is relatively more difficult to understand and requires a deeper understanding of the policy provisions and further underwritings.
Fatal Accidental Death Cover
Under certain circumstances, an employee may be eligible for free accidental death insurance. This provision is available at no extra cost, but is primarily dependant on interviews with the insured individual.
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