What is relevant life insurance?
Relevant life insurance, often called relevant life cover, is a form of death-in-service benefit which is set up and paid for by a company, but pays out to a staff member’s or director’s family upon death. It’s typically used by businesses that aren’t big enough to create a group scheme but would like to provide a benefit for their directors and employees.
Relevant life insurance can also be useful to high earning directors and employees who have used their pension lifetime allowance as a traditional group life scheme would count towards their retirement savings.
What does relevant life cover mean?
Relevant life cover is the name of an insurance product most frequently used by small businesses to provide death in service benefits to company directors and employees. It’s also a tax-efficient way to for high earners to access life insurance.
Is a relevant life policy a benefit in kind?
No, HMRC does not consider relevant life insurance to be a P11 Benefit in kind, despite it being taken out to the advantage of the individual. What this means is that there is no additional income tax to pay or National Insurance to worry about.
How does relevant life insurance work?
Relevant life insurance isn’t dissimilar to a traditional life insurance policy, in that the individual is assessed based on how much cover is required, their age, health and lifestyle. The amount of cover requested will likely be determined by factors such as your mortgage, bills and salary, ultimately like a traditional life insurance policy, you will want to ensure that your loved ones are looked after in the event of your death. Once you’ve decided on the amount of cover required and your other circumstances have been assed a premium will be generated and rather than the individual paying for the policy, the business does. If the insured individual dies while working for the company and while the policy is active, then a tax-free payout will be made to their beneficiaries, which is usually their family members. Relevant life insurance policies can be taken out for employees as a benefit as well as for business owners and directors. The cover is a good perk for staff, but relevant life cover taxation is fairly generous too.
Level or linked to inflation
When you take out a relevant life insurance policy, you can choose between cover for a set amount, known as level, or for it to be linked to inflation so that the payout is in line with the cost of living at the time of claim. By linking the payout to inflation, you also link the premiums too, so you can expect the cost of the policy to increase as time passes.
Taxation
Relevant life insurance policies aren’t treated as a benefit-in-kind, so the insured don’t have to pay any additional income tax. The business can however treat the policy as an expense and therefore will enjoy a reduction in their corporation tax bill. Finally, if the policy is written into trust the payout to beneficiaries becomes free of any inheritance tax. As you can see, relevant life cover is an extremely tax-efficient benefit.
Death in service cover
Death in service benefit is a form of benefit that’s provided by an employer which pays out a tax-free lump sum of cash if you die while you’re employed by the company in question. It usually provides a tax-free payout of between two and four times the individual’s salary. In comparison, a relevant life insurance policy may offer more cover and can be used alongside a death in service policy.
Benefits of relevant life insurance
Benefits for companies
Relevant life insurance is a tax-efficient alternative to group life policies. A group scheme often works out cheaper for large teams, but companies with just one or even no members of staff typically wouldn’t usually qualify. Relevant life insurance allows directors or company owners to cover themselves using their business rather than their own personal income, as well as providing a benefit to any employees if they so wish. It also has the benefit of reducing the company’s corporation tax bill as it can be treated as an expense. Finally, it’s a useful way to attract and retain staff as it demonstrates that you value their contribution and care for them and their wider family.
Benefits for employees
A relevant life insurance policy gives employees life insurance without them having to pay premiums or even contribute via their wages or income tax. Depending on the level of cover that a company provides, it can still be worth individuals having their own personal policy to ensure that they have sufficient cover for their own circumstances. Relevant life cover is particularly beneficial for high earners as an alternative to joining a group life assurance scheme because group schemes, count towards an individual’s annual pension lifetime allowance, whereas relevant life policies don’t. Group policy payouts will typically fall under the allowance, risking a hefty tax bill when they access their pension.
Ultimately, relevant life insurance gives you the reassurance that your family will be looked after with a tax-free payment, which can be used alongside any other policies you may have set up.
How much relevant life insurance should you get?
Employers that offer death in service benefits to their staff usually offer somewhere between three and ten times the employee’s salary. You will need to work out what is right for your employees and company and importantly what is affordable. If you’re a company director that is looking to take out a policy purely for your own protection, then we would suggest you consider what bills and expenses you have, such as your mortgage and look to cover that with the policy.
How much does relevant life insurance cost?
The cost of relevant life insurance will depend on the level of cover you opt to take out, alongside the individual’s age, health and lifestyle. As with all insurance products, it’s always worth shopping around as there are different levels of cover with different providers.
Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.
