Updated 23 January 2017
More than a quarter of estates passing on death contain an insurance policy, most commonly life insurance. However, there is one corner of the market that is often overlooked. Neil Adams of protection advisers Drewberry explains a less well-known product that can deliver better value for company directors: relevant life insurance.
You may not have heard of ‘relevant life cover’. It’s essentially life insurance that is paid for by an employer, and is available wherever there is an employer-employee relationship. The key difference is that relevant life cover can offer you significant savings on premiums compared to a personal life insurance policy.
Why is this? Essentially it’s because relevant life policies are owned and paid for by a company rather than the individual insured. An individual will buy personal life insurance out of their net income, after both tax and National Insurance contributions (both employer and employee) have been paid.
Not so with relevant life plans. With these, HMRC usually allows premiums to be deducted as a business expense, saving the company corporation tax. There’s also no employer or employee National Insurance to pay on the premiums. These savings combine to ensure that relevant life cover is often significantly cheaper than a policy paid for by an individual. It can therefore offer a company director considerable savings at both the personal and corporate level.
How much could a company director save?
More than a quarter of estates passing on death contain an insurance policy, most commonly life insurance . If you’re a company director and you currently pay for your own life insurance from your own income, you could save money by having your company pay for this cover instead. In broad terms, a basic rate taxpayer currently paying £100 a month for a personal life insurance plan could save 31.5% every month by switching to a relevant life policy. Those in higher tax brackets could save even more.
The Drewberry website has a useful calculator that can help you get an estimate of your likely savings.
Not only can directors save money on their personal cover, but the corporation tax and National Insurance savings offered by relevant life insurance make it attractive for businesses too – especially small start-ups.
For instance, relevant life cover provided to employees is not typically treated as a taxable benefit in kind, whereas some other insurance policies provided by employers (e.g. private medical insurance) might be. A valuable employee benefit like this can be used to recruit and retain employees, as well as making them feel more valued and so aiding their productivity.
High earners with substantial pension pots may also benefit. These individuals could find relevant life insurance a better alternative to standard death-in-service benefits. This is because death-in-service payouts are generally classed as being a pension benefit for tax purposes and are added to an employee’s pension pot. A death-in-service payout of a multiple of salary could easily tip a person’s pension over the lifetime allowance (£1 million in the 2016/17 tax year) and the excess would incur a 55 per cent penalty tax.
Relevant life policies, when written into a relevant life trust for the beneficiaries, also escape inheritance tax (IHT) because the payout never becomes part of the deceased’s estate. This makes them attractive for people who already have sizeable estates and are concerned about the tax implications of their death.
Moreover, relevant life insurance written into trust can actually be a solution for IHT quandaries. Inheritance tax must be paid before the beneficiaries can access the deceased’s estate. As the trust containing the payout isn’t part of the estate, it provides the deceased’s beneficiaries with cash on hand to pay the IHT bill as it falls due.
Goliath, meet David: how the small can think big
Relevant life cover was introduced partly to address the inequality between small and large companies in terms of the life cover available. Whereas larger firms have the option of group life insurance, companies with fewer than five employees (which make up a significant proportion of the UK’s business population) don’t have access to this market. Even a single director can obtain relevant life cover with the associated tax advantages, making it very SME-friendly.
When you reflect that in relevant life cover you’ve got a product that can address issues of protection, tax efficiency, tax planning, business startups, employee benefits, retirement planning and estate planning all at once, it’s remarkable that more people don’t know about it.
Is it right for your company?
The best way to decide whether relevant life insurance is right for you and/or your company is to ask a specialist adviser. There are however certain pitfalls associated with this type of cover, so it’s important to tread carefully.
For instance, the policy must pay out before an employee reaches 75 and the primary purpose of the plan must not be seen to be tax avoidance on the company’s behalf. Relevant life must also have no critical illness element attached, and cannot have a surrender value. Furthermore, although company directors are eligible for relevant life cover, it is not typically available to sole traders or partners in a partnership etc.
Your adviser will help you find the right cover for you, and also adviser you on how to make best use of all the tax benefits it offers. This is why it’s so important to see a protection specialist who understands this area comprehensively and can source products from the whole of the market.
About the author
Neil Adams is a financial adviser with Drewberry Wealth, whole-of-market pension and investment advisers and a subsidiary of Drewberry Insurance, whole-of-market protection advisers. Neil has a Diploma in Financial Planning (DipPFS) undertaken with The Chartered Insurance Institute (CII) and has also passed the advanced G60 Pensions examination.