Tax efficient life cover
Life cover – why have it?
To protect loved ones from financial worries, should the worst happen. You insure your car; so shouldn’t you insure your most valuable asset – yourself?
What is Relevant Life cover?
- A policy that provides individual life assurance – for example to a salaried director.
- Provided for the individual and paid for by the company.
- Pays out a tax-free, lump sum on the death (or in circumstances where a ‘significant illness’ involves retirement) of the person insured.
- The proceeds go to the employee’s family or financial dependants.
It is a tax efficient way to provide life cover for business owners and employees – a key employee benefit.
The main tax benefits of Relevant Life Insurance policies are:
- The premiums, paid by employers, on a Relevant Life Plan will not constitute a benefit in kind, as the policy will be providing retirement death benefits.
- An employer should be able to claim tax relief in relation to the premiums paid, so long as the premiums meet the ‘wholly and exclusively for the purposes of the business’ test.
- Proceeds by way of a claim will not be subject to Income Tax or Corporation Tax.
- In comparison to a personal protection policy taken out on a personal basis and paid for by the employer, there will be national insurance savings for both the employee and employer
Why think about it?
- It provides the opportunity for smaller companies to offer a death-in-service benefit to its employees (including salaried directors).
- Offering life and ‘significant illness’ cover demonstrates how much your business cares about the well-being of your employees, which can be useful in both recruitment and retention.
It’s an important financial planning solution for:
Often small business don’t have enough employees to be able to offer a group scheme. However, relevant life cover can be on an individual basis. Therefore, a small business can take advantage of the tax efficiencies generally enjoyed by larger companies.
High earning employees
Group schemes are restrictive in the amount of cover provided, and what is included as ‘salary’. For a higher earner this may not provide sufficient cover.
As opposed to a Relevant Life Plan, there are some little known pitfalls with a group life scheme – this is because a group scheme falls under pension legislation.
Why does that matter?
If the person covered dies, the lump sum death benefit is added to the employee’s pension fund. So when it comes to calculating the lifetime allowance (currently £1,055,000 the tax year 2019/20) – this lump sum could make a big difference as anything over the allowance is taxed at up to 55%.
Crucially, benefits from a relevant Life Insurance Policy won’t count towards either the annual or the lifetime pension allowance.
What does it cost?
Whilst paid by the company, the premiums themselves are no different to what an individual would pay for the same cover. Below are some examples of monthly costs, dependent upon age and cover amount. The quotes below assume good health and would be subject to medical underwriting.
Taking a non-smoking 55 year old with a ten-year policy term and £250,000 cover, the monthly premium for a relevant life policy is £43.74.
Using a company to pay this premium would amount to a monthly saving of £23.76 per month for a basic rate taxpayer when compared to paying personally after accounting for Corporation Tax, National Insurance and Income Tax. For a higher rate taxpayer, the saving amounts to £48.56 per month, again accounting for Corporation Tax, National Insurance and Income Tax.
Lots of our clients will be paying for personal life cover which can simply be paid by the business and obtain the same tax reliefs. Talking to clients about using their business to make savings such as with their life insurance will add value to your service.
A version of this blog originally appeared on the blog of MHA member firm, MHA Tait Walker.