Relevant life insurance policies offer a cost-effective and tax-efficient alternative to traditional life insurance for small businesses. These policies enable employers to provide life cover for employees, including directors, while benefiting from potential tax savings for both the business and the individual.
Relevant life insurance provides a "death in service" benefit, paying out to an employee’s beneficiaries if they pass away while employed. This type of cover is particularly valuable for smaller businesses that may not be large enough to implement a group life scheme but still wish to offer attractive benefits to their employees.
How does relevant life insurance work?
The level of cover for a relevant life insurance policy is determined by assessing the employee’s requirements alongside factors such as their age, health, and lifestyle. These elements help the insurer calculate the risk and set the premium accordingly.
The relevant life insurance policy is funded by the company, not the individual. If the employee passes away while employed, a tax-free lump sum is paid to their beneficiaries, typically family members.
The policy can either have fixed premiums with a set payout or be inflation-linked, where both the lump sum and premiums increase over time to maintain value.
Some policies also include a payout in the event of a terminal diagnosis, provided the employee is still with the company and the policy remains active. Additionally, certain policies may offer the option for continuation if the employee leaves or changes employment.
Is relevant life cover a benefit in kind?
No, relevant life cover is not classified as a benefit in kind, meaning the recipient does not have to pay income tax on the policy’s value. Additionally, businesses can typically claim the premiums as a deductible expense, helping to reduce their tax liability.
How much does relevant life cover pay out?
Similar to traditional death-in-service policies, the lump sum payout under a relevant life cover policy is calculated as a multiple of the employee's total remuneration.
This calculation can include salary, bonuses, and dividends. The multiple typically ranges from 10 to 25 times the employee’s remuneration, depending on the provider, policy terms, and the employee's age.
Is relevant life insurance worth it?
Relevant life insurance offers notable tax advantages for both individuals and businesses. Since it is not considered a benefit in kind, no income tax is payable by the employee. Additionally, if the policy is written into a trust, the payout can potentially be used to cover an inheritance tax liability.
For businesses, the premiums are typically treated as a tax-deductible expense, reducing the company’s corporation tax liability.