Do you have family members working in your business? Relevant life insurance policies are the way to go.
If the worst were to happen and a family member who is also an employee in your business was to die unexpectedly, the implications for the business could be catastrophic. Relevant Life Insurance policies can be a tax-effective way to solve the problem.
You may already know is that it is possible for a business to protect itself financially from the potentially devastating consequences by taking out insurance.
But what you may not know is that there is a particular way of arranging this protection that qualifies for tax relief.
Small businesses can provide a financial safety net to the families of their directors and employees by taking out Relevant Life Plans (RLPs).
These tax-efficient plans are there to provide some financial stability during the emotional and uncertain time following the death of a loved one.
What are Relevant Life Insurance Policies (RLPs)?
RLPs are life insurance policies where the premiums are paid for by the business and which pay out a lump sum if the insured employee passes away.
Who benefits from a Relevant Life Insurance Policy (RLP)?
It is the family of the employee who receives the pay-out, rather than the business itself.
Can anyone have a Relevant Life Policy (RLP)?
RLPs are available to anyone who is classed as an employee, including company directors of limited companies.
Are RLP’s suited to smaller businesses?
Larger companies generally have group life insurance policies in place to cover their employees.For smaller businesses with only a few employees however, it is not always cost-effective or practical to provide this type of cover.
Relevant Life Insurance Policies are the best way for smaller businesses to offer their employees more cost-effective protection.
What are the tax benefits?
In contrast to standard life insurance products taken out by individuals which don’t qualify as tax-deductible, by using RLPs, substantial tax savings can be achieved.
Relevant Life insurance premiums are an allowable business expense, meaning they can be offset against taxable business profits and result in a reduced tax bill.
As an added bonus, the policies are also not treated as a taxable benefit for the employee.
Once the tax deduction is taken into account, net premiums could be almost 50% cheaper for higher rate tax payers when compared to personal life insurance policy premiums.
By way of an example, a Relevant Life Plan with an annual premium of £1000 could only cost £810 once the tax deduction has been taken into account.
In contrast, if a personal life insurance policy were to be used, once income tax and National Insurance contributions have been factored in, the costs would be almost £1600 or almost £800 more expensive. That’s virtually double the price!
Are Relevant Life Plans attractive to high-earning individuals?
RLPs are an attractive option for high earning individuals too, such as directors looking for lump sum benefits without affecting their Pension Lifetime allowance.
Many group life-based insurance schemes are governed by pension legislation meaning any pay-outs will be regarded as payments from your pension pot.
However, if you have already accumulated a substantial pension pot then these schemes may not be tax efficient for you.Were you to exceed the lifetime limit of £1 million you would incur substantial tax charges.
Relevant Life Policies on the other hand, ensure people have adequate life cover for their family without it affecting their pension arrangements.
A win/win situation!
What level of cover do Relevant Life Policies offer?
RLPs are a great way to provide extensive life insurance cover to individuals and their families.
Depending on age and provider, they can provide cover of up to fifteen times total earnings, subject to certain financial limits.
Group life insurance products, on the other hand, typically insure three or four times your salary.
This important distinction between your total remuneration and salary may be especially crucial for business owners who take a small salary, but a larger dividend.
What happens if I leave the company?
Relevant Life Policies can be continued provided an ex-employee takes over responsibility for paying the premiums when they leave.
This simple process means no new applications, medicals, or underwriting are required. This may be especially important for older workers or those who have had a history of health problems as they avoid what could be a significant increase in the cost of arranging new cover.
With all the everyday challenges involved in running a business, it is easy to put issues such as insurance on the back boiler. This usually means that it never ends up being put in place.
Quite apart from the benefits to families, more and more, employees, in general, are being attracted to businesses that offer valuable benefits rather than just a basic salary.
Offering a Relevant Life Plan to employees can be a great way for small businesses to stand out and attract key talent whilst also gaining some tax benefit.
If you would like to discuss this further, please contact your usual THP manager. They will be happy to arrange a meeting with our team from Sterling and Law to review your own protection arrangements and to show you how you can make good use of Relevant Life Plans.
About Kevin Wheeler
My career in the financial services industry started over 30 years ago and I joined Sterling & Law in 2014.
I can offer a wealth of experience in both the personal and corporate sectors, in areas such as (workplace) pensions, pension transfers, retirement provision, life insurance, investment and inheritance tax planning.
I am also Sterling & Law’s specialist auto enrolment project manager, designing, planning and implementing auto enrolment solutions for employers since the auto enrolment regulations were introduced in 2012.
I provide a thorough professional service and aim to develop lasting relationships with my clients.
I am married with two teenage children and enjoy playing tennis, table tennis and going on bike rides with the family.