Is relevant life cover still worth having?

What are the benefits of company life cover?

When you provide life cover to your employees, it benefits you and them. Life insurance pays your employee's family a tax-free lump sum benefit, so your staff know that their family will have financial security if they die unexpectedly.

Your business will benefit because your monthly premiums are an allowable business expense for corporation tax purposes. Providing your employees with life cover shows them you value them, which could make you an employer of choice and help you attract investment.

Relevant life insurance is a type of life insurance policy that a business takes out on behalf of its employees. It's typically more tax efficient than individual policies and is available to smaller companies not eligible for a group life scheme.

Relevant life insurance works like other life insurance policies in that it pays out a lump sum to your employees' loved ones when they die. A relevant life policy can also pay out if your employee is diagnosed with a terminal illness and has less than 12 months to live.

When you choose a relevant life insurance policy, you pay premiums to provide death-in-service benefits for your staff. Relevant life insurance only covers employees if they die while they still work for you, but the death doesn't have to be work-related or happen during work time.

You can tailor the amount of relevant life insurance cover you offer based on your needs and budget. The lump sum payment that the policy pays out is usually a multiple of an employee's salary. The maximum coverage that your insurer will offer typically depends on each employee's age. For example, they'll likely offer a higher multiple to an employee under 50 than to one approaching retirement.

However, you can still offer anything between 15 and 25 times an employee's salary. You can decide how much coverage you want your relevant life policy to provide and whether you want the policy to be index-linked. Index-linked policies typically cost more as premiums increase over time. However, they ensure that your employees' death-in-service benefit retains the same buying power whether they die tomorrow or in 25 years.

You can provide death-in-service benefits to your staff with a group life scheme or a relevant life insurance policy.

You'll need a minimum of five employees to use a group scheme. Otherwise, it works the same way as relevant life insurance in that you choose the coverage you need and pay premiums to cover all your employees.

You can find out more about group life insurance here.

We've already mentioned that the tax rules for life insurance have changed. The new rules alter how pensions and life cover are taxed and may cause you to reconsider how you provide death-in-service benefits to your team.

Here's our outline of the previous rules and how they've changed.

Tax rules before the budget statement

Before the Spring Budget Statement in 2023, pensions and life insurance were subject to a pension lifetime allowance. Suppose an individual's pension and life insurance benefits were over £1,073,100. In that case, they'd pay income tax at 55% for anything over that amount if they received it as a single payment or 25% if they received it in any other way.

However, this rule previously only applied to group schemes and not relevant life insurance. It meant employers could provide additional death-in-service benefits to high earners using a relevant life policy. This was particularly useful for company directors and high earners whose total pension and life insurance benefits may have exceeded the lifetime pension allowance if an employer hadn't used relevant life insurance.

What are the new rules?

The Government's Spring Budget statement in March 2023 announced that the pension lifetime allowance charge would be abolished from April 2024.

It means you can save as much as you like in a pension and receive a life insurance payment over the previous pension lifetime allowance without paying extra tax. In practice, this could mean that relevant life insurance isn't worth having because it doesn't offer tax benefits. A group life policy could be as tax-efficient as relevant life insurance policies.

The new rules may make you question whether your business can still benefit from taking out relevant life insurance. There are still some advantages to using relevant life insurance depending on your employees' needs and your company.

Businesses with fewer than five employees

You won't be eligible for a group policy if you're a limited company or limited liability partnership with less than five employees. However, you can provide coverage with a relevant life policy. The premiums for relevant life insurance cost less than a personal life insurance policy. It's also more tax-efficient for you and your employees. You can deduct the premiums from your corporation tax bill, and they'll also pay less tax as HMRC don't treat life cover as a benefit in kind.

Corporations

Relevant life insurance can still offer large corporations a tax-efficient way of increasing the life insurance payout they can offer their high-earning staff and directors. The lifetime allowance will apply to anyone retiring before 6 April 2024, so a relevant life insurance plan can form a valuable part of their benefits package up to that date. The Spring Finance Bill also clarified that some funds would still be taxed under the old rules if they exceeded £1,073,100 before 6 April 2023.

You and your employees should speak to a financial adviser if you need clarification on the tax implications of your current arrangements.

Talk to your accountant

There are various factors to consider regarding the type of life insurance your company provides and how the coverage is structured. It can impact your corporation tax bill, and individual arrangements such as salary sacrifice schemes can also affect your tax affairs.

Getting professional advice tailored to your business will give you a clearer picture and allow you to make an informed choice.

You must have a limited company or limited liability partnership (LLP) to take out relevant life insurance cover. Sole traders registered with HMRC but who don't have a separate registered business can't take out relevant life insurance and will need to arrange an individual life insurance policy.

The cost of your life insurance premiums depends on various factors, whether you choose a relevant life plan or group life insurance.

The first three factors will typically influence the cost of your premiums with any life insurance provider. The fourth may affect the price, depending on your circumstances and chosen policy.

The average age of your employees

As we age, our risk of dying increases. The higher the average age of your employees is, the more your premium will cost.

How much cover you need

Your premium will depend on the number of employees you want to cover and the amount you want the policy to pay.

While offering a higher payout will increase your premium, increasing the number of staff will reduce the cost per head as your insurance company can spread the risk.

The type of work you do

The premiums for higher-risk industries will cost more than office-based businesses. Insurers can also consider individual roles. For example, if your staff mainly work in the office, but you have a handful of employees engaged in high-risk work, the premium will be lower than if it was the other way around.

Your employees' medical history

It's worth noting that while most group plans don't ask employees for any medical information when they join, many relevant life plans do. Providing this information can increase the paperwork you need to do and potentially increase the cost.

You'll generally only need to provide medical information on a group policy if you want to exceed your insurance provider's usual cover limits so they can assess the overall risk.

What are the tax benefits of company life insurance?

One of the main benefits of life insurance policies is that they are highly tax-efficient. However, getting professional advice is essential to consider the impact on your tax bill.

Corporation tax

Your premiums are an allowable business expense, so you can claim corporation tax relief and reduce your company's corporation tax bill.

National Insurance

HMRC doesn't treat life insurance as a benefit in kind, so you don't have to pay employer's National Insurance contributions on the premiums. It also means that your employees won't have to pay National Insurance contributions on the benefit.

Employee income tax

Some employee benefits, such as health insurance, mean your employee must pay extra income tax. One of the benefits of relevant life and group life insurance is that they don't attract an additional income tax charge.

Inheritance tax

Most life insurance payouts are exempt from income tax and capital gains tax. However, beneficiaries may still be liable for inheritance tax unless payments are made into a trust. Most life cover is set up using a discretionary trust to avoid this.

Get professional advice

Relevant life cover can still form a valuable part of your employee benefits package. We're specialist brokers who can offer you tailored advice on the right insurance products for your business.

Get in touch for a comparison quote.