What is relevant life insurance?
Employee benefits such as life insurance and health insurance are generally only offered by large employers and big corporates. Often smaller business owners would love to offer benefits like these policies to help with staff retention.
Group life insurance schemes (death in service benefits) can be expensive and extremely complicated, which can also make them time consuming. There are many benefits to group life insurance schemes but the costs can make them restrictive to most small businesses.
There is now an alternative type of cover called relevant life insurance which is far cheaper and quicker to arrange.
This policy is a form of death-in-service cover that is specifically designed for key employees and company directors. This type of cover will pay out a cash lump sum to the family of the employee or director if they die or are diagnosed with a terminal illness (an illness with a life expectancy of 12 months or less). The policy premiums are paid for by the company.
How does Relevant life insurance work?
A relevant life insurance policy is the same as a traditional policy as they both pay out a cash lump sum upon the death of the person insured. There are some key differences between a traditional life cover and relevant life insurance, such as:
|Relevant life insurance
|Traditional life insurance
|Who owns the policy?
|Who pays for the policy?
|Is the policy written in trust?
|Can the policy be joint lives?
|Is the policy tax efficient?
|Can you add critical illness cover
|Only with some insurers
|Maximum age (end of policy term)
|75 years of age
|90 years of age
As you can clearly see from the table above, there are some key benefits to relevant life insurance, but it can also be limited, so may not suit everyone. You can arrange a policy to protect a family (level term) or a mortgage (decreasing term) which is also different to group life insurance as this can only be a level term.
You can also take out a relevant life insurance on an indexation cover basis which means that your cover will increase in line with inflation. This can be extremely useful option for people who want their cover to retain its value without further underwriting. Indexation is also available on traditional life cover and can help to keep the policy value over the term of the cover.
Another great thing about this policy type is that it is extremely tax efficient because of HMRC rules. A relevant life cover is classed as a retirement benefit which means that there is no benefit in kind with this cover. You will therefore not need to disclose a relevant life insurance policy on your P11D.
Relevant life insurance tax treatment
One of the main benefits to a relevant life insurance policy is the tax benefits that you get when you take out this type of cover. As we mentioned to you above, this is part of a HMRC approved scheme that is classed as a retirement benefit.
There are a number of elements that make this policy type extremely tax efficient for your business and your employees. Your business can save up to 49% compared to traditional life cover premiums purely in tax savings.
Some of the key differences between the tax treatment of these two policies are:
|Relevant life insurance
|Traditional life insurance
|Income Tax payable
|Corporation Tax relief
|Benefit in Kind
The net effect to your policy premiums with relevant life cover is you can save up to 49% vs traditional life cover.
About relevant life insurance HMRC rules
Even though relevant life insurance is a common type of cover, very few accountants and tax specialists are aware of it or how it works.
Can you get relevant life insurance for contractors?
There is also an option and it is possible to get relevant life insurance for contractors in certain circumstances. Whilst relevant life insurance is designed to provide small companies with an option to provide life cover, some contractors can also get this type of cover.
There are some rules that will apply in this situation which will define whether you are able to get this type of cover or not.
- Do you have a Limited Company?
- Are you a company director or salaried employee?
- Do you pay yourself a salary through your company?
Best relevant life insurance
A common question that we get asked is ‘what are the best relevant life insurance cover for me?’. There are only a few different types of policy available and so it is usually fairly simple to answer.
Types of relevant life insurance include:
- Level term cover
- Decreasing term cover
- Relevant life insurance with serious illness cover (e.g. cancer, heart attack, stroke etc.)
- Increasing cover (index linked)
When you apply for cover, you should consider:
- How much cover you need
- What do you want to protect (e.g. family or mortgage)?
- Which type of cover is important to you?
- What are you taking cover out for?
Is relevant life insurance a benefit in kind?
One of the most common tax questions that we get asked about this type of cover is, ‘is relevant life insurance benefit in kind?’.
Most senior employees and directors will be very familiar with P11D benefit-in-kind, to calculate the value of any employee benefits. In this instance, benefit in kind does not apply so there is no P11D implications.
The HMRC rules state that relevant life insurance is tax deductible because it is classed as a retirement benefit so there is no benefit in kind applied. The premiums are not classed as an income for the employee either.
Relevant life insurance limited company rules
The most common type of relevant life insurance is for limited company employees and owners of the business.
There are several limited company rules to consider:
- Salaried employees and owners
- Must be between the age of 17 and 71
- Will only include serious illness (unable to return to work)
- Does not include disability cover
- Must be written to Trust (RLP discretionary trust)
From a tax perspective, your income must also be proportionate to the amount of cover and the premiums. For example, some insurers will allow you to cover up to 35 times your gross annual salary (cover amounts can vary depending on your age).