Life insurance cover is a benefit large companies often offer their staff as a perk.
The problem is that for small businesses, the cost of taking out a group insurance scheme may be too expensive. Relevant life insurance is a potential solution that works out much cheaper than taking out cover personally.
What is relevant life cover?
It is essentially life insurance that a business pays for. It is available wherever there is an employer-employee relationship. The key difference is that relevant life cover can offer significant savings on premiums compared to a personal life insurance policy. This is because the business, rather than the individual insured, owns and pays for the cover.
An individual will buy personal life insurance out of their net income after paying tax on it. This is not the case with relevant life plans. HMRC usually allows the business to class the premiums as a business expense, saving on corporation tax. There is 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.
The idea behind Relevant life cover was to address the inequality between small and large companies in terms of the life cover available. Even a single director can obtain relevant life cover with the associated tax advantages.
These plans pay the death benefits through a trust which means such payments are free from inheritance tax.
Will it save me money?
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.
You can find a useful calculator here that can help you get an estimate of the likely savings.
Is relevant life cover right for my company?
The best way to decide whether relevant life insurance is right is to get financial advice. There are however certain pitfalls associated with this type of cover, so it’s important to tread carefully.
For instance, the policy must end before the employee’s 75th birthday and the primary purpose of the plan must not be seen to be tax avoidance. Furthermore, although company directors are eligible for relevant life cover, it is not typically available to sole traders or partners in a partnership etc.
An adviser will help find the right cover and work out how to make the best use of all the tax benefits it offers.