by Life insurance isn’t just for the big corporations. As a small business owner, you might want to offer life insurance to your employees but find that setting up a group life insurance policy is too expensive or complicated. Relevant Life Cover provides a tax-efficient and affordable way for companies to offer individual life insurance for their staff. Whether you’re a business owner looking for a way to protect your employees or a director seeking personal life insurance through your company, Relevant Life Cover could be a smart option.
So, what exactly is Relevant Life Cover, and how does it work? Let’s dive into the details to help you understand how this policy could benefit you and your business.
What is Relevant Life Cover?
Relevant Life Cover is a life insurance policy that allows a business to provide death-in-service benefits to its employees. If an employee covered by the policy passes away during their time with the company, the policy will pay a lump sum to their family or other beneficiaries. The policy is designed for smaller businesses that want to offer life insurance but may not be large enough to set up a full group life insurance scheme.
Here’s where it gets interesting: the premiums are tax-deductible for the business, which makes it a cost-effective solution for both the employer and the employee. Additionally, the premiums don’t count as a taxable benefit for the employee, which means they don’t have to pay extra taxes on the life insurance benefit.
How Does Relevant Life Cover Work?
Here’s a breakdown of how Relevant Life Cover functions, step by step:
- Employer Takes Out the Policy: The employer sets up the policy on behalf of the employee. The employer pays the premiums, and these are usually considered a business expense, which reduces the company’s taxable income.
- No Benefit in Kind: The premiums paid by the employer are not treated as a benefit in kind, so the employee doesn’t get taxed on them.
- Trust Structure: The policy is placed in a trust. This ensures that the lump sum payout goes directly to the employee’s beneficiaries and is free from inheritance tax.
- Lump Sum Payment: If the employee dies during their employment, their family or chosen beneficiaries receive a tax-free lump sum payout.
- Terminal Illness Benefit: Many policies include a terminal illness clause, which means the employee can receive the payout early if they’re diagnosed with a terminal illness and expected to live less than 12 months.
- Coverage Until Age 75: The policy usually provides coverage until the employee reaches 75 years old. After that, the policy ends unless other arrangements are made.
When Should You Consider Relevant Life Cover?
Relevant Life Cover isn’t for everyone, but there are certain situations where it’s the perfect fit. If any of these scenarios sound familiar, this policy might be worth considering.
Your Business Doesn’t Have a Group Life Scheme
Small businesses often don’t have enough staff to justify setting up a group life insurance policy. Relevant Life Cover fills this gap, allowing you to offer life insurance to individual employees without the complexity of a large scheme.
You Want to Offer Tax-Efficient Life Insurance
One of the biggest perks of Relevant Life Cover is its tax efficiency. For the business, the premiums are treated as a business expense, and for the employee, there’s no tax to pay on the premiums. This makes it an attractive option for businesses looking to offer benefits without adding to their tax burden.
You’re a Company Director or High Earner
If you’re a director of a limited company or a high-earning employee who exceeds the limits of group life insurance policies, Relevant Life Cover is a great way to secure individual life insurance without taking on additional personal tax burdens.
How Much Does Relevant Life Cover Cost?
The cost of Relevant Life Cover varies depending on several factors. These include the amount of cover, the length of the policy, and whether you choose increasing or level cover. Let’s break down these factors to give you a better understanding of the potential costs.
The Amount of Cover
The more cover you choose, the higher the premiums will be. Businesses typically choose the level of cover based on the employee’s salary or their overall financial needs.
How Long the Cover Lasts
The longer the policy lasts, the more expensive it will be. Most policies provide cover until the employee reaches 75, but shorter-term policies are also available.
Increasing or Level Cover?
You can opt for increasing cover, which adjusts the payout over time to keep up with inflation, or level cover, which stays the same throughout the policy term. Increasing cover usually has higher premiums but protects the payout’s value over time.
Reviewable or Guaranteed Premiums?
Guaranteed premiums remain fixed throughout the policy, which gives you certainty about the cost. Reviewable premiums can be adjusted by the insurer over time, often starting lower but potentially increasing as time goes on.
What Are the Tax Benefits of Relevant Life Cover?
Relevant Life Cover is incredibly tax-efficient, which is one of its key selling points. Here’s how the tax benefits work:
- For Employers: The premiums are typically classified as a business expense, reducing the company’s taxable income. This makes it a cost-effective option for businesses wanting to offer life insurance benefits to their staff.
- For Employees: Employees don’t pay tax or National Insurance on the premiums because they aren’t treated as a taxable benefit. Additionally, the payout is generally free from inheritance tax if the policy is written in trust.
What Are the Benefits for Employees?
For employees, Relevant Life Cover offers financial peace of mind. Knowing that their family will be provided for if the worst happens can be a significant comfort. Here are the main benefits for employees:
- Tax-Free Payout: The beneficiaries receive a lump sum that is free from income and inheritance tax, as long as the policy is in trust.
- No Personal Tax on Premiums: Employees don’t face extra tax on the premiums, as these are paid by the employer.
- Terminal Illness Benefit: In many cases, if an employee is diagnosed with a terminal illness, they can access the payout early, helping to cover medical bills or other financial needs.
Are There Any Exclusions with Relevant Life Cover?
Every life insurance policy comes with exclusions, and Relevant Life Cover is no exception. Here are the most common exclusions to be aware of:
Residence
If an employee spends extended periods living outside the UK, they may not be covered under the policy. Always check the terms of the policy for residency rules.
Employment Status
Only employees of limited companies are eligible for Relevant Life Cover. Sole traders and partners in partnerships cannot take out this policy for themselves.
Terminal Illness
Some policies may only offer terminal illness cover if the diagnosis happens within a certain period before the policy term ends.
Failure to Disclose Important Information
If an employee fails to disclose vital medical or lifestyle information when applying for the policy, it could invalidate the cover.
The Cause of Death
Some causes of death, such as those related to extreme sports or hazardous activities, may be excluded from coverage. Review your policy to understand the specific exclusions.
How Does Relevant Life Cover Differ From Group Life Insurance?
You might be wondering why you would choose Relevant Life Cover over a group life insurance policy. Here’s how they differ:
- Designed for Small Businesses: Group life insurance is typically aimed at larger companies with many employees. Relevant Life Cover is designed for smaller businesses that want to offer individual coverage.
- Customizable Coverage: Group life insurance tends to offer a set amount of coverage for all employees, whereas Relevant Life Cover can be tailored to individual needs.
- Tax Efficiency: Relevant Life Cover often offers more tax benefits, particularly for smaller companies. The premiums are considered a business expense, making them more tax-efficient than group policies.
Why Choose Relevant Life Cover Over Traditional Life Insurance?
You might be asking yourself, “Why not just take out a regular life insurance policy?” The answer lies in the tax advantages and flexibility of Relevant Life Cover. Here’s why it’s often the smarter choice:
- Tax Savings: With traditional life insurance, you’d pay the premiums from your after-tax income. With Relevant Life Cover, the business pays the premiums as a tax-deductible expense, saving you money.
- Employee Benefit: Relevant Life Cover allows companies to offer valuable life insurance benefits to their employees in a tax-efficient way. It’s a great way to attract and retain top talent without the financial complexity of group schemes.
Conclusion
Relevant Life Cover provides a simple, tax-efficient way for small businesses to offer life insurance to their employees. It’s ideal for companies that aren’t large enough to justify a group life insurance scheme but still want to provide valuable benefits to their staff.
Whether you’re a business owner looking to offer extra security to your team or a director wanting life insurance without the personal tax burden, Relevant Life Cover could be the perfect solution. With the right plan in place, you can ensure that both your business and your employees are protected for the long haul.
FAQs
Q: Who is eligible for Relevant Life Cover?
A: Relevant Life Cover is available to employees of limited companies, including directors. Unfortunately, it’s not available for sole traders or partners.
Q: How much does Relevant Life Cover typically cost?
A: The cost depends on several factors, including the amount of cover, how long the policy lasts, and whether you choose increasing or level cover. The more cover you need, the higher the premiums.
Q: What happens if the employee leaves the company?
A: Some policies allow the employee to continue the cover if they leave the company. This is known as portability and can be a useful feature for employees who move on to other jobs.
Q: Is the payout from Relevant Life Cover tax-free?
A: Yes, as long as the policy is written in trust, the payout is usually tax-free and exempt from inheritance tax.
Q: Can I include critical illness cover in a Relevant Life policy?
A: No, Relevant Life Cover does not include critical illness cover. If you want critical illness protection, you’ll need to take out a separate policy.
