Relevant Life Cover: A Simple Guide for Business Owners
People are a critical asset in every business.
But to recruit and retain the right people, it helps to offer attractive benefits. Relevant Life Cover can be a key element of that benefits package. It’s a tax-efficient way to support your employees.
This guide explains everything you need to know about Life Cover.
What is Relevant Life Cover?
Relevant Life Cover is a tax-efficient life insurance policy. It gives death-in-service benefits to employees outside of a registered group life scheme.
The insurance is set up and funded by the employer. It pays out a lump sum on the death (or terminal illness diagnosis) of the insured. The payout is made to the insured’s family or dependants.
What Are the Benefits of Relevant Life Cover?
If you’re a small business you may choose to provide your employees with Relevant Life Cover as it means you do not have to set up a group life scheme.
High-earning employees who are close to exceeding their pension lifetime allowance can benefit from Relevant Life Cover. That’s because the benefits from registered group life schemes are counted towards the pension lifetime allowance. However, the benefits from a Relevant Life Cover policy are not.
This type of cover would also be suitable for group life scheme members who want to increase the benefits available to their family or dependants.
How Does Relevant Life Cover Work?
A discretionary trust should be set up as this names the beneficiaries. Such as the spouse and other family members. This ensures that the money is paid to the correct beneficiaries and the benefits are tax-efficient.
When your employee dies or is diagnosed with a terminal illness, their family makes a claim. The insurer pays the trustees and the trustees are responsible for paying the beneficiaries. Inheritance tax does not apply as the proceeds are held in a trust.
You can choose the level of cover for your employees. Most employers base this on a multiple of their employee’s salary. The multiple amounts can vary depending on the age of the employee.
Some policies will allow you as the employer to increase cover without extra underwriting in certain circumstances. These can include:
- A mortgage increase due to moving house or home improvements
- Getting married or entering a civil partnership
- The birth or adoption of a child
- Increase in salary
Who Can Have Relevant Life Cover?
It can be used by employees and salaried directors within a company.
However, sole traders, partners and members of limited liability partnerships cannot take part.
What is the Tax Position with Relevant Life Cover?
This form of cover is a tax-efficient benefit to offer to your people. That’s because the premiums are a tax-deductible business expense (unlike some group schemes). This applies so long as they are under the ‘wholly and exclusively’ rules.
The benefits are also usually free from inheritance tax if they’re paid through a trust.
3 Key Things to Remember
It’s important to review the details of a Relevant Life plan. Key things to look for include:
1) UK Resident and Employee
The person insured must be a UK resident and an employee of a UK business. The policy should also be written into a discretionary trust.
2) Payout to Individual or Charity
A Relevant Life plan can only payout as a lump sum to an individual or charity on the death of the person covered. The benefit cannot be reinvested in the business.
3) Check for Exceptions
There may also be exceptions, such as if the person insured dies from intentionally taking their own life within the first 12 months of the policy.
What are the Differences between Relevant Life Cover, Key Person Insurance and Shareholder Protection?
It can be confusing to understand the many types of insurance to protect your business and its people. However, the key difference is whether the insurance benefits the individual or the business.
This form of policy covers an individual and is set up to help their family. If the insured dies, their family or dependants can cover living costs and bills.
Shareholder protection also ensures that there is a succession plan for the company ownership to avoid disputes and allow the business to continue running smoothly.
How to Set up Relevant Life Cover Within Your Business
We can help you set up your policies as a benefit for your employees. Give us a call on 0345 224 3175 to book an appointment.