Relevant Life Insurance
Relevant life insurance is a form of tax efficient life insurance. In the event of the worst happening, relevant life cover allows the company to pay out a lump sum of money to the employee’s family or financial dependants, in order to cover the absence of a main financial earner.
When the lump sum is paid to the chosen person(s), it is usually free from any inheritance tax payments, providing it is paid into a trust. The trust element is important, as it means all of the funds should go to the person(s) they are intended for, it’s important to note that if the employee changes employers, the new employer must take over the policy payments and ensure the policy still remains in the original declaration of trust.
The lump sum of money is seen as an amount that will cover the absence of a main household earner. Although it doesn’t appear very different to life insurance, the tax efficient nature of relevant life insurance makes it a lot more beneficial for those who are eligible.
Group life schemes have been the predominant option of life insurance paid through the business as of late, however, with group life schemes, there are a minimum number of employees that have to sign up for the cover. There is no minimum amount of employees that have to sign up for relevant life cover, making it a more favoured form of insurance for small businesses in particular.
What Are The Main Benefits of Relevant Life Insurance?
Relevant life doesn’t just benefit the employee in question, it also benefits the employer, making it an attractive proposition for all parties involved.
The benefits of the employee include:
- The policy payments are not classed as a benefit in kind and therefore, do not need to be included on your P11D form.
- No national insurance needs to be paid on the policy payments.
- Your pension is not affected when you take out relevant life insurance, because they are a ‘non-registered’ arrangement.
Benefits for the employer include:
- No corporation tax needs to be paid, as long as the cover is taken out ‘wholly and exclusively for the purpose of the business’. This is because the reason for the expense must not be seen as non-business related in order to qualify for its tax-free nature.
- As is the case with the employee, no national insurance is paid on the monthly premiums.
Terms and Conditions of Relevant Life Insurance
Relevant life insurance cover stops at the age of 75.
It is a business only form of insurance and cannot be used for personal reasons. This is because the tax-efficient element is approved by HMRC for business purposes only.
How Much Will You Save With Relevant Life Insurance?
Relevant life insurance has a lot of benefits but in order to demonstrate how worthwhile it is, we have calculated how much you can save if you choose a relevant life plan over a standard form of life insurance. Those who are in the higher bracket of earners should expect to save around 49% and those earning a lower salary will still save around 36%.
If you’re wondering how you are saving this much… it’s because relevant life insurance qualifies as an allowable business expense under HMRC and therefore, the monthly premiums are free from any tax deductions.
Example of how you save with Relevant Life:
Assuming a monthly premium of £20, with an income tax rate of 45% and 30 years remaining on the current policy.
On Standard Life
On a standard life insurance policy, you would pay £20 monthly from your personal account.
Assuming your income tax is at 45% and you pay 2% national insurance, to cover the £20 a month plus tax and NI you would be paying £37.74.
The employer would then have to pay NI at 13.8%. That’s £42.94 per month, £515 a year and £15,460 for the 30-year policy length.
On Relevant Life
This example with a relevant life policy would mean the company wouldn’t pay corporation tax, so the total over the 30 year policy period would be £5,760 instead of £15,460.
This results in a £9,700 saving that is put back into company profit by subtracting the relevant life rate from the standard life rate (£15,460 – £5,760 = £9,700.)
Seeing a breakdown displays that losing the tax and national insurance costs paid on a standard life insurance plan and switching to relevant life will save you thousands.
*Calculations are based on the current tax rates (as at 2018): standard rate taxpayers =12%, higher rate taxpayers = 2% and employer national insurance = 13.8%.