Business Protection - Relevant Life Protection
Relevant life protection is a tax-efficient assurance policy, which can be used by employers to offer a death-in-service benefit to their employees.
The policy will pay out a tax-free lump sum directly to an employee's chosen beneficiaries in the event of their death within the policy term, and provisions can even be made for the policy to pay out if an employee is terminally ill.
Relevant Life policies are generally put in place for:
Smaller limited companies that would like to offer benefits to employees, but aren’t eligible to set up a Group Life Insurance scheme (these require a minimum number of employees/lives assured).
Directors that would like to make life insurance provisions in a more tax-efficient manner.
High earners with large pension benefits, who may have annual allowance or lifetime allowance issues.
From an employer’s point of view, the main benefit of a relevant life policy is that it can help smaller businesses to attract and retain high quality staff. The policy premiums are very often deductible for corporation tax purposes. The policy benefits the employee, as their loved ones can receive a tax-free lump sum in the event of a successful claim, and the policy premiums are not treated as a Benefit-in-Kind, nor are they subjected to Income Tax & National Insurance.
This form of policy offers a tax-efficient way to take out personal life cover, as the policy pay-out does not affect an individual’s pension Lifetime Allowance. This is especially beneficial to high earning directors/employees with large pension funds. Having said this, a Relevant Life policy should never be used in place of the shareholder protection arrangements; click here to read our previous article for more information on Shareholder protection.
The following table gives an indication of the saving that can be made when setting up a Relevant Life policy for a higher rate taxpayer. The savings could be even greater for an additional rate taxpayer, or less for a basic rate taxpayer.
As shown above, the total cost of the policy can be almost halved when it is set up as a Relevant Life plan for a higher rate taxpayer. The premiums are very often deductible as a business expense for corporation tax purposes, although it is worth double checking this point with the business’ local tax inspector.
Relevant Life policies can only be taken out by Limited Companies, so they are not available to Sole Traders, Partnerships or Limited Liability Partnerships.
The protection policy must be set up in a relevant life discretionary trust, and the money from a successful claim will be paid into the trust initially. The employee’s chosen beneficiaries are then entitled to receive the money paid into the trust in the event of a claim.
It is important to carefully manage the timing of setting up the protection policy and the trust, as the corporation tax relief may not be available if they are set up incorrectly.
There are a great deal of variables that must be considered when arranging any protection policy, let alone business protection plans. With so many insurance providers and policies to choose from, it is essential that you engage with a financial adviser, to guide you through the protection market and pinpoint the policies that suit the needs of your business.