Relevant Life Insurance is a type of life insurance policy specifically designed for small businesses and their employees, particularly directors and key employees. It’s a way for companies to offer death-in-service benefits outside of a group life scheme. Here’s a breakdown of how it works and its benefits:
Key Features:
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Individual Coverage:
- It provides a single life insurance policy for an individual employee or director rather than a group scheme.
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Tax Efficiency:
- Premiums are typically considered as a business expense, which can be tax-deductible.
- Benefits are usually paid out tax-free to the employee’s beneficiaries.
- No National Insurance contributions are required on the premiums.
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Target Audience:
- Ideal for small businesses, directors, and key employees.
- Useful for companies that do not have enough employees to justify a group life scheme.
How It Works:
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Policy Setup:
- The company takes out the policy on behalf of the employee.
- The company pays the premiums.
- The policy is written into a trust, ensuring the payout goes to the employee’s beneficiaries.
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Coverage:
- Covers death and, in some cases, terminal illness.
- Provides a lump sum payment to the beneficiaries upon the death of the insured employee during the policy term.
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Trust Arrangement:
- The policy is written into a trust to ensure that the benefits are paid out to the intended recipients without being subject to inheritance tax.
- Trustees manage the policy on behalf of the beneficiaries.
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Policy Term:
- Generally, policies are set for a term that aligns with the employee’s expected tenure or until retirement age.
- Terms can vary but often range from 5 to 40 years.
Benefits:
- For the Employer:
- Attracts and retains key employees by offering valuable benefits.
- Costs are considered a business expense, reducing corporation tax liabilities.
- For the Employee:
- Provides peace of mind knowing that their family or dependents will be financially protected.
- No income tax liability on the premiums paid by the employer.
- Benefits are typically paid out tax-free.
Considerations:
- Eligibility: Typically, only employees (including directors) of the company are eligible. Self-employed individuals cannot take out relevant life insurance.
- Regulation: Policies must comply with specific criteria set by HM Revenue and Customs (HMRC) to ensure the tax benefits are applicable.
- Trust Setup: Properly setting up the trust is crucial to ensure the tax benefits and correct distribution of benefits.
Summary:
Relevant Life Insurance is a tax-efficient life insurance solution for small businesses, providing significant benefits for both employers and employees. It ensures that employees’ beneficiaries receive a substantial payout in the event of the employee’s death while offering tax relief for the business. Proper setup and adherence to HMRC guidelines are essential for maximizing its benefits.
Additional Details on Relevant Life Insurance
Eligibility and Suitability:
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Eligible Companies:
- UK-based limited companies, partnerships, charities, and limited liability partnerships (LLPs) can set up relevant life insurance policies.
- Sole traders are not eligible.
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Eligible Employees:
- Employees, including salaried directors, are eligible.
- Policies are not typically available for non-employee shareholders or partners in a partnership unless they are also salaried employees.
Policy Benefits:
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Death-in-Service Benefit:
- Provides a lump sum payment if the insured dies while employed by the company.
- Can be structured to pay out up to a multiple of the employee’s salary, commonly up to 15-20 times the annual salary.
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Terminal Illness Cover:
- Many policies include terminal illness cover, which pays out if the insured is diagnosed with a terminal illness with a life expectancy of less than 12 months.
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Flexibility:
- Policies can often be tailored to meet the specific needs of the business and the employee.
- Coverage amounts and terms can be adjusted to align with salary increases and changing business needs.
Tax Implications and Benefits:
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Tax-Deductible Premiums:
- Premiums paid by the employer are usually treated as an allowable business expense, reducing the corporation tax liability.
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No P11D Benefit in Kind:
- Premiums are not treated as a benefit in kind for the employee, so they are not subject to personal income tax.
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No National Insurance Contributions:
- Both employer and employee avoid National Insurance contributions on the premiums.
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Tax-Free Payout:
- The lump sum benefit is typically paid out free from income tax and inheritance tax, provided it is set up correctly within a trust.
Trust Arrangement:
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Purpose of the Trust:
- Ensures that the payout goes directly to the beneficiaries and is not considered part of the employee’s estate.
- Helps avoid probate delays, ensuring quick access to funds for the beneficiaries.
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Trustees:
- Typically, the employer and an independent trustee (often a legal advisor) manage the trust.
- Trustees are responsible for managing the policy and ensuring the benefits are paid out according to the trust’s terms.
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Setting Up the Trust:
- Professional advice is recommended to ensure the trust is set up correctly and complies with legal requirements.
- Trust documents are usually provided by the insurance company but should be reviewed by a legal professional.
Other Considerations:
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Cost:
- Premiums for relevant life insurance can be more cost-effective compared to setting up individual life policies for each employee due to the tax advantages.
- Costs vary based on the level of coverage, age, health status of the insured, and policy term.
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Underwriting:
- Policies are typically subject to underwriting, which may include health assessments and medical history reviews.
- Premiums can be adjusted based on the insured’s health status and lifestyle factors.
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Review and Renewal:
- Regular reviews are recommended to ensure the coverage remains adequate as the business and employee circumstances change.
- Policies can usually be renewed or adjusted at key milestones, such as salary increases or changes in business structure.
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Legal and Compliance:
- Ensuring compliance with HMRC guidelines is crucial for maintaining the tax advantages.
- Professional advice from tax advisors, legal professionals, and insurance brokers is advisable to navigate the complexities.
Conclusion
Relevant Life Insurance offers a tailored and tax-efficient way for small businesses to provide valuable life cover for their employees. By setting up these policies correctly, businesses can provide significant benefits to their key employees while also enjoying tax savings. The trust arrangement ensures that the benefits are delivered swiftly and tax-free to the beneficiaries, providing peace of mind for both employers and employees.
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Relevant Life Insurance FAQ
General Questions
Q: What is Relevant Life Insurance? A: Relevant Life Insurance is a life insurance policy that provides death-in-service benefits to employees, including salaried directors of small businesses, outside of a group life scheme. It’s a tax-efficient way for companies to offer life cover to their employees.
Q: Who can take out Relevant Life Insurance? A: UK-based limited companies, partnerships, charities, and limited liability partnerships (LLPs) can take out relevant life insurance for their employees, including directors. Sole traders are not eligible.
Q: Who is eligible for Relevant Life Insurance? A: Employees and salaried directors of the company are eligible. Non-employee shareholders or partners who are not salaried employees cannot be covered.
Q: What are the main benefits of Relevant Life Insurance? A: The main benefits include tax-deductible premiums for the employer, no income tax on the premiums for the employee, no National Insurance contributions, and a tax-free lump sum payout to beneficiaries.
Policy Details
Q: What does Relevant Life Insurance cover? A: It covers death during the policy term and often includes terminal illness cover, which pays out if the insured is diagnosed with a terminal illness with less than 12 months to live.
Q: How much coverage can be provided? A: Coverage can typically be up to 15-20 times the employee’s annual salary, depending on the policy terms and the insurance provider.
Q: How long is the policy term? A: The policy term can vary but generally ranges from 5 to 40 years, often aligning with the employee’s expected tenure or retirement age.
Q: Can the policy be tailored to individual needs? A: Yes, policies can be tailored to meet the specific needs of the business and the employee, with adjustable coverage amounts and terms.
Tax and Financial Considerations
Q: Are the premiums tax-deductible? A: Yes, premiums are usually considered an allowable business expense, reducing the company’s corporation tax liability.
Q: Are there any tax liabilities for the employee? A: No, the premiums are not treated as a benefit in kind, so the employee does not pay personal income tax on them.
Q: Is the payout tax-free? A: Yes, the lump sum payout is typically tax-free, provided the policy is set up correctly within a trust.
Q: Do the premiums involve National Insurance contributions? A: No, there are no National Insurance contributions required on the premiums for either the employer or the employee.
Trust Arrangement
Q: Why is the policy written into a trust? A: Writing the policy into a trust ensures that the payout goes directly to the beneficiaries, bypassing the employee’s estate and avoiding inheritance tax. It also helps avoid probate delays.
Q: Who manages the trust? A: The trust is typically managed by trustees, which can include the employer and an independent trustee, often a legal advisor.
Q: How is the trust set up? A: Trust documents are usually provided by the insurance company, but it’s advisable to have them reviewed by a legal professional to ensure compliance with legal requirements.
Practical Considerations
Q: How are premiums calculated? A: Premiums are based on factors such as the level of coverage, the term of the policy, and the insured individual’s age, health status, and lifestyle.
Q: What does the underwriting process involve? A: The underwriting process may include health assessments and reviews of the insured’s medical history. Premiums may be adjusted based on the findings.
Q: Can the policy be reviewed and adjusted? A: Yes, it’s advisable to review the policy regularly to ensure it continues to meet the needs of the business and the employee. Adjustments can be made at key milestones, such as salary increases or changes in business structure.
Q: What happens if the employee leaves the company? A: If the insured employee leaves the company, the policy typically lapses unless it is transferred to a new employer or converted to a personal policy.
Q: How do I ensure compliance with HMRC guidelines? A: Professional advice from tax advisors, legal professionals, and insurance brokers is recommended to ensure the policy and trust are set up and maintained in compliance with HMRC guidelines.
Conclusion
Relevant Life Insurance is a valuable benefit for small businesses and their employees, offering tax advantages and peace of mind. Proper setup and regular review of the policy and trust arrangement are essential to maximize these benefits.