What is Relevant Life Cover?

As an owner of a limited company, you can take out a relevant life policy which covers your own life and will pay a sum to your family/dependants if you pass away or are diagnosed with a terminal illness.

The policy is paid for by the business, which can mean a number of advantages compared to a normal personal life insurance policy. Most significantly, it can be tax efficient and result in savings of up to 50% on the premiums, depending on your tax band.

Do you want to provide a ‘death in service’ benefit to your staff? A relevant life policy can also cover the life of any of the company’s employees meaning the business can offer a benefit which can help attract and retain employees. This may be of interest if you don’t have enough employees to acquire a group life policy, or if you only wish to cover certain people within the business.

Other advantages of a relevant life policy include:

  • Death benefit usually free of inheritance tax.
  • Sum insured of up to 25 times the life assured’s annual remuneration.
  • Must be written into trust for the benefit of your chosen beneficiaries, meaning the sum gets paid out much quicker than waiting for probate.

“88% of businesses valued under £250,000 have never heard of relevant life”. [stated in Legal & General’s State of the Nation’s SMEs 2015]

  • What makes a Relevant Life policy tax efficient?

    Firstly from the business’s perspective, there are no National Insurance contributions to pay on the premiums. The company continues to receive corporation tax relief.

    For the employee, there are no National Insurance contributions or income tax on the premiums or benefits throughout the policy.

    Policy type Non-relevant Life Relevant Life
    Monthly premium to insurer £100.00 £100.00
    Employee Income tax (40%) £68.96 None
    Employee NI (2%) £3.45 None
    Total employee earnings needed to fund monthly premium £172.41 £0.00
    Employer NI (2%) £23.79 None
    Gross cost to company £196.20 £100.00
    Corporation tax relief amount (20%) £39.24 £20.00
    Total net premium £156.96 £80.00

    This example creates a saving of £76.96 per month which is 49% cheaper than a non-relevant life policy.

Why do I need to register a trust for my Relevant Life policy?

All relevant life policies must be written into trust. This will help ensure:

  • Policy proceeds are ring-fenced from Inheritance Tax.
  • Benefits paid out without having to wait for Probate to be granted.
  • Avoids having to follow the laws of intestacy.
  • You nominate your beneficiaries and trustees.

What happens if the employee leaves the company?

Should the life covered leave the employment of the company, there are 3 options:

1) The policy is cancelled, there are no fees or charges for doing this.

2) The employee takes over the payment of premiums resulting in the policy becoming a normal personal life insurance. The existing trust agreement ceases and the future tax savings will no longer apply. In this instance, the terminal illness benefit is removed.

3) The life assured’s new employer takes over payment of the premiums, all tax advantages remain in place.

 

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