When considering life cover options for employees, one of the most efficient and cost-effective solutions available to UK businesses is the Relevant Life Plan. This type of life insurance is particularly appealing to small and medium-sized enterprises (SMEs) and directors of limited companies, as it provides life cover on behalf of employees while offering potential tax advantages. In this blog, we will explore what a Relevant Life Policy is, what it covers, who can benefit from it, and the tax implications associated with it.
What is a Relevant Life Plan?
A Relevant Life Plan is a life insurance policy arranged by an employer to provide life cover for their employees or directors. In the event of the employee’s death or diagnosis of a terminal illness, the benefit is paid out to the employee’s family or designated financial dependents. One of the major attractions of a Relevant Life Plan is that the premiums are paid by the employer, but the benefit is for the employee’s loved ones. The premiums are not considered a taxable benefit for the employee, making it a highly attractive option for both parties.
The policy itself is owned by the employer, but the payout goes to the employee’s family through a discretionary trust. This ensures the money is protected and distributed according to the wishes set out by the policyholder.
What Does a Relevant Life Policy Cover?
A Relevant Life Policy typically pays out upon the death of the employee or upon an earlier diagnosis of a terminal illness (when the individual is expected to live for less than 12 months). Some policies also offer the option to include serious illness cover, which can provide a payout in the event of critical conditions such as cancer, heart attacks, or strokes.
It’s important to note that while a Relevant Life Policy offers comprehensive life cover, it cannot be used for covering business-related risks, such as business loan protection or succession planning. This policy is purely designed to provide financial support to the employee’s dependents, ensuring their financial security in difficult times.
Tax Benefits and Considerations
One of the standout benefits of a Relevant Life Plan is its tax efficiency. Because the premiums are paid by the employer, they are typically treated as a business expense, and the premiums are not considered a benefit in kind for the employee. This means the employee doesn’t pay income tax, national insurance, or corporation tax on the premiums.
When a claim is made, the proceeds are also exempt from income tax and corporation tax. As the policy is held in a discretionary trust, the payout is not subject to inheritance tax either, providing even greater financial security to the employee’s family. However, it is worth noting that the discretionary trust itself may be subject to periodic and exit charges, similar to other non-pension trusts.
Eligibility: Who Can Apply for a Relevant Life Policy?
Relevant Life Policies are available to employees and directors of limited companies, as well as employees of partnerships, charities, and sole traders. However, sole traders and equity partners themselves are not eligible for this type of cover. This is a key point to keep in mind for those running their own businesses, as the policy is strictly intended for employee benefit rather than personal or business use.
Trustees and Beneficiaries
The role of trustees in a Relevant Life Policy is essential, as they are responsible for managing the trust and ensuring the benefit is distributed according to the policyholder’s wishes. Trustees can include business partners, family members, or close friends. The beneficiaries of the policy are typically the employee’s immediate dependents, such as their spouse or children.
The structure of the trust ensures that the policy’s payout is protected and goes directly to those it is intended for, without the complications of probate or inheritance tax.
Coverage Limits and Insurer Guidelines
When it comes to the amount of cover you can secure with a Relevant Life Plan, insurers apply specific limits based on the policyholder’s age and income. These limits ensure the cover remains proportionate to the employee’s financial circumstances. The general guidelines are as follows:
- Up to age 35: Up to 30 times the employee’s annual salary
- Ages 36-50: Up to 25 times the employee’s annual salary
- Ages 51-60: Up to 20 times the employee’s annual salary
- Age 61+: Up to 15 times the employee’s annual salary
These limits can also take into account additional income sources, such as bonuses, commissions, overtime, and even dividends for shareholders and directors. Some insurers apply these limits only if the cover requested exceeds £1,000,000, making it a flexible option for higher earners as well.
Maximum Age for Cover
While the typical maximum age for Relevant Life Policyholders is 75, this may vary depending on the insurer. It’s important for employers to check with their insurance provider to understand the specific terms and conditions related to age limits.
A Relevant Life Plan provides a tax-efficient way for employers to offer life cover to their employees, with benefits payable to their dependants in the event of death or terminal illness. This type of policy can be a valuable addition to an employee benefits package, offering peace of mind to both employers and employees.
It’s important for businesses to understand the specifics of a Relevant Life Policy, including eligibility criteria, tax implications, and coverage limits, in order to determine if this solution is suitable for their circumstances. As with any insurance decision, it’s advisable to seek guidance from a financial adviser or specialist to ensure that the policy meets the needs of both the business and its employees.
If you’d like to speak to one of our advisers please do get in touch.
For specialist tax advice, please refer to an accountant or tax specialist
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Trusts are not regulated by the Financial Conduct Authority.
