Relevant Life Cover

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Meet the Author

Nathaniel Lee

Knows about: Relevant Life Cover

Job Title: Business Protection Adviser

Been an adviser for: over 9 years

Qualifications: CeMAP

Relevant Life Cover (Part 1)

Nathaniel Lee explains relevant life cover and how it can benefit small businesses.

What is relevant life cover and how does it work?

Relevant life cover – or relevant life plans – are insurance policies for businesses to take out on employees, as an employee benefit. They effectively offer an individual death in service scheme.

In the SME market, you might not have enough people to provide a death in service plan, or you’re not yet at the size where you can afford it. You might just want cover for yourself. A relevant life plan can be a tax-efficient way of putting your own life insurance through your business.

If you buy life insurance through your personal bank account, you don’t get corporation tax relief, but you could with a relevant life plan as there are potential tax savings when structured correctly.

Let’s say you’ve got a limited company and you’ve got personal life insurance. You make your profit, then you pay corporation tax, and you pay your employees’ national insurance and income tax. Only then do you pay the premiums.

If that premium is £100, you might have to make £150 business to net down to that position.

But with a relevant life plan, that same £100 comes out before corporation tax is applied. It helps offset the corporation tax, so that £100 now costs you £75.

Paying £75 as a tax-adjusted figure compared to £150 means you could get up to a 50% saving. This is a highly simplified example and is only intended to illustrate how the saving is arrived at. Exact savings vary based on individual circumstances, tax rates and business structure.

Potential tax efficiencies will vary depending on the remuneration structure and personal circumstances. These are illustrative figures only.

How does relevant life cover differ from personal life insurance?

It’s similar to personal life insurance, with a few structural differences. You structure it through your business instead of personally, tax treatment differs and there are limits to who can have it.

There are some limitations to it. You can only take it to age 75, whereas personal cover allows you to take term insurance to age 90, or to get a whole-of-life policy. Relevant life plans are limited to age 75 under the legislative framework.

How does relevant life cover differ from death in service benefit?

It’s different because it’s one-to-one. The employer takes out one plan for one individual, and any payout is put into Trust for the beneficiaries.

For a death in service plan, you’ll need at least two individuals who work for the same company. More often than not, the minimum threshold is three, five or ten people, depending on the provider.

With death in service, the medical underwriting is less intrusive, while on an individual plan you have to answer all the questions and disclose medically relevant information. On a group plan, there’s a free cover limit or an automatic acceptance limit. If you don’t breach that, death in service starts at about £500,000 typically, with no in-depth medical questions.

The business just has to answer a few overarching questions such as, has there been a death at the firm in the last few years? Has anyone had cancer? In many cases, they typically do not require further individual medical underwriting.

Because of this, someone who is precluded from individual cover could potentially get group cover. But death in service goes up each year and the costs can increase significantly.

Who is eligible for relevant life cover?

Generally, it’s any employee of a limited company. You have to have an employee-employer relationship. If it’s an LLP, you don’t qualify if you’re a member, only if you’re an employee.

What is the primary purpose of taking out a relevant life cover policy?

It’s similar to death in service, but on an individual basis. It’s an employee benefit from the business, providing a policy through work that’s tax-efficient.

The primary purpose isn’t for cover to be offset against corporation tax, but that’s a huge benefit. The legislation also states that it shouldn’t be taken for personal reasons – so you wouldn’t peg it directly to a mortgage, for example.

Relevant life plans are designed to provide death-in-service style employee benefits rather than personal financial planning. Different insurers interpret HMRC guidance differently, so suitability should always be assessed on an individual basis.

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In the event of a claim, who receives the payout?

The Trust does. The owner and payer is the business, but the life assured is the employee, so the policy pays out into Trust for their beneficiaries. Typically that would be their partner and children.

On death, the money would be paid into the Trust and then the Trustees release the money to the beneficiaries.

What does Discretionary Trust mean in the context of relevant life cover, and why is it used?

There are many different types of Trust. The most common one is a Discretionary Trust, where Trustees have discretion to pay the money to the beneficiaries as they see fit. You’d want to make sure all of the rest of your financial planning is set up, in terms of Wills and estate planning.

Let’s say a couple take this out and they pass away in an accident together, leaving behind two children aged under 18. They can’t be given £500,000 at that point because they haven’t got the financial wherewithal.

The Trustees have the beneficiaries’ best interests at heart and use their discretion to decide how that money is best used. It could be that the funds pay for care for those children until they reach 18.

Even at 18, they might not be financially mature enough to receive hundreds of thousands of pounds. They could be given the money gradually over time, and when they demonstrate financial maturity, they receive the remainder.

Obviously, the Trustees can’t just pay it to themselves – unless they’re also the beneficiaries.

This type of Trust makes sure that the right people get the money at the right time in a suitable way.

Is relevant life cover a benefit in kind?

No, relevant life cover is generally considered an allowable expense and not generally considered not a benefit in kind provided the arrangements meet the legislative requirements

Can relevant life cover be on a decreasing basis?

You can arrange relevant life cover on a decreasing basis, yes. A couple of providers have those sorts of contracts; however, most don’t offer that.

What level of cover can an employee typically secure with a relevant life policy?

It depends on their age, and most providers have a table of multiples. The older you get, the lower the multiple. The assumption is that as you go through your working life, your income will increase, as you get more senior and make more money through your business.

When you’re younger, the cover can be up to 35 times your income. As you age, it can reduce as low as 10 times. But at least one provider has no multiple up to £1 million of cover.

You couldn’t justify the multiple approach for someone earning a lot of money. If their salary is £500,000, 35 times that is millions of pounds. Most of the time the level of cover is in the hundreds of thousands, going up to £1.5 million or so.

There has to be a demonstrable relationship between you and the business. If you’re just a shareholder and not an employee or a director, where you’re not involved in the day-to-day and you don’t receive a salary, you won’t qualify. There is also an age cap of 75.

You also can’t include certain add-ons like waiver of premium or total permanent disability.

One company offers critical illness cover under the relevant life plan tax rules, but it is very restricted.

Unlike other critical illness policies that pay out on lots of different conditions, this only pays out on a few very serious things – a stroke so severe that you can’t walk or talk, for example.

We don’t generally advise on that product. If you need critical illness cover, we’d much rather you have a broader contract than save tax on the premiums.

We’ve covered a lot here – do you have anything to add?

If you run a limited company and you need life insurance, it’s worth speaking to a business protection advisor. It’s a gateway into other types of products and risks that you may not necessarily have considered.

Key Takeaways:

Relevant life cover is an individual death in service scheme offered by businesses as a tax-efficient employee benefit.
Premiums are typically treated as an allowable expense and are paid before corporation tax is applied, resulting in substantial savings compared to paying for personal life insurance.
The policy is a one-to-one arrangement between the employer and the individual, differing from group Death in Service plans which require a minimum number of employees.
Eligibility generally requires an employee-employer relationship within a limited company, with an age cap of 75 years for the cover.
In the event of a claim, the payout goes into a Discretionary Trust for the beneficiaries, giving Trustees the discretion to release the money at a suitable time, such as when children demonstrate financial maturity.

Relevant life plans are subject to underwriting, eligibility criteria, policy definitions, exclusions and insurer terms and conditions. Tax treatment depends on individual circumstances and may change in future. The availability of corporation tax relief is not guaranteed and depends on HMRC practice. Business Protected does not provide legal or tax advice. For specialist legal or tax advice, please consult a qualified solicitor, accountant or tax adviser.