What is Relevant Life Cover?
Relevant Life Cover is a tax efficient way for small businesses to provide stand-alone, single life, death in service cover.
It is designed to provide a death in service benefit for employees of small companies and high earning individuals (including salaried directors).
As it will need to be written in trust – it will then pay a tax-free lump sum to the beneficiaries or dependants if the person covered was to die or was diagnosed with a terminal illness whilst employed during the term of the plan.
General Limits & Terms
- Cover available up to a general maximum cover limit of £10,000,000.00 subject to it being no more than 20 times remuneration (up to the age of 39) and 15 times remuneration (age 40 or over). This can include salary, regular dividends paid in lieu of salary and any benefits in kind.
- The cover must be paid in a single lump sum before the age of 75, with the beneficiaries normally restricted to family members and dependants.
What are the benefits of Relevant Life Cover?
Benefits for Employers
As the premiums are paid by the employer, it’s a tax efficient way of offering an employees a valuable benefit:
- Personal life assurance
- Aid recruitment of high quality candidates
- Improve staff retention
HM Revenue and Customs (HMRC) usually treat the premiums paid for Relevant Life Cover as an allowable business expense, so as long as the local Inspector of Taxes is satisfied they qualify under the ‘wholly and exclusively’ rules. This means that all premiums and benefits paid will usually qualify for relief on Income Tax, Corporation Tax and National Insurance.
Benefits for Employees
Relevant Life Cover premiums don’t count towards an individual’s allowance for tax purposes, other advantages include:
- Benefits are payable free of Income Tax
- Benefits are usually free from Inheritance Tax (however, in specific circumstances there may be a periodic tax charge on the trust)
- Any benefit paid as Relevant Life Cover would not count towards the employee’s lifetime allowance for pensions
- The employee can increase the amount of cover without additional underwriting (within certain limits) with a Guaranteed Increase Option.
What Makes It Tax Efficient?
Relevant Life Cover is personalised and counts as a business expense, which means its tax deductible and does not count towards annual or lifetime pension allowances. It’s a cost effective way to offer life insurance if their business is not eligible for a group life scheme.
HM Revenue & Customs (HMRC) usually treat the premiums paid for Relevant Life Cover as an allowable business expense, as long as the local Inspector of Taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
What does this mean?
This means that all premiums and benefits paid will usually qualify for relief on:
- Income Tax, Corporation Tax, and National Insurance.
When you take into account these potential cost savings, the cost of cover is significantly reduced, when compared to the cost of a typical equivalent life insurance policy.
What makes it cost effective?
The following example aims to show the potential saving on Relevant Life Cover compared to an employee paying for their own life cover from their net pay.
|Relevant Life Cover||Relevant Life Cover||Non-relevant Life Cover|
|Total annual premium||£394.92||£394.92*|
|Employee NI contribution (2%)||N/A||£13.62|
|Income Tax (40%)||N/A||£272.36|
|Employer NI contribution (13.8%)||N/A||£93.96|
|Total gross cost||£394.92||£774.86|
|Less Corporation Tax (20%)||£78.98||£154.97|
Life cover details:
- Most life companies will utilise a discretionary trust with regard to a Relevant Life Policy to maximise the flexibility for the trustees.• It is possible to nominate either individuals or the company itself to be a trustee on a Relevant Life Policy; this will depend upon the Life Company used.
- The policy provided is a Level Term Assurance policy as standard, although some life assurance companies will in certain circumstances provide a decreasing cover.
- Guaranteed and reviewable premiums are available dependent upon a client’s individual requirements, and the cover can be set to be increased/index linked and/or be on a renewable contract basis.
- It is worth noting that a relevant Life policy is underwritten on an in individual basis and therefore acceptance is dependent upon the outcome of this underwriting.