A short guide to relevant life plans
As part of our Every Business Matters, Every Employee Matters campaign, in partnership with Legal and General, we take a look at how relevant life plans can save your company cash.
What is a relevant life plan?
A relevant life plan is insurance for an employee in case of death in service. It’s a plan paid into by the employer, which is designed to pay a lump sum if the employee dies or is diagnosed with a terminal illness.
“Very few people have heard of the plan, so the uptake of the policy is very small compared to the number of people who could benefit and save”
Who should consider these policies?
- Directors wishing to provide their own individual ‘death in service’ benefits without taking out a scheme for all employees
- High-earning employees where ‘death in service’ does not form part of their ‘lifetime allowance’ (£1.5 million 2012/13)
- Relevant life plans are not available where there isn’t an employer-to-employee relationship. For example: sole traders, equity partners of a partnership or equity members of a Limited Liability Partnership
To whom are these relevant life policies aimed at?
The majority of company directors have some personal life insurance. But nearly all of these are paying for their life insurance either personally through pre-taxed income or through their company and getting a P11D benefit-in-kind penalty for this. Up until recent years, getting the limited company to pay for personal life insurance was only possible for companies that took group life insurance, often these type of policies were only possible for companies wishing to insure 10 or more employees.
“A higher-rate taxpayer can save 49 per cent by paying for their personal life insurance via a relevant life plan. For a basic-rate tax payer the saving is around 36 per cent”
There is a better way!
But things have now changed following the launch from Bright Grey and its relevant life policy. This unique policy took advantage of pension legislation from A Day in 2006 and because of the way the life insurance was set up under trust and because the limited company paid for the policy no benefit-in-kind issues affected the employee or director.
What are the savings?
Relevant life plans are similar to most other types of life cover except they aim to provide a tax-efficient benefit provided by an employer for an employee.
This means that for a higher-rate taxpayer, the company director can save 49 per cent, by paying for their personal life insurance via a relevant life plan. For a basic-rate taxpayer the saving is still significant at around 36 per cent. The problem is that most company directors and even accountants have never heard of the plan. Therefore the uptake of the policy is very small compared to the number of people who could benefit and save.
Who offers the policy?
Originally the relevant life policy was offered by Bright Grey only. Other providers held back to ensure that the legislation that the policy took advantage of was solid. Since then another six providers have entered the market which has help keep premiums competitive due to increased competition. The new providers are Scottish Provident, Zurich, AEGON, Legal & General, Pru Protect and LV.
How much cover can you have?
Like a traditional death in service policy, the sum assured with a relevant life policy is also based on a multiple of remuneration. For a company director the definition of remuneration is based on salary plus dividends plus bonuses etc. The multiples vary from provider to provider and depend on the age of the director being insured. These range from 10 times remuneration to 25 times remuneration.
Typical relevant life examples
The majority of clients that seem to take out relevant life insurance tend to be IT contractors that contract through their own limited companies. Typically their spouse will also be a director and therefore cover is arranged for both parties in line with their insurance needs and remuneration multiples. Of course many other types of company directors can benefit such as tradesmen, business consultants, doctors or any one working through their own limited company. Other clients may include bigger businesses looking to take out three or four death in service policies for a few of their employees.
Speak to an independent financial adviser to discuss how your business could benefit from a relevant life policy and make sure your business doesn’t fall down the protection gap.
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About the author
Damian Youell is a financial adviser with Needing Advice.co.uk and has helps clients take advantage of tax-efficient life insurance plans.