What is relevant life insurance?

What is relevant life cover?

Relevant life insurance allows you to provide your employees with life cover if a group life scheme isn't suitable for your business. Life insurance is a valuable, tax-efficient benefit, so it's well worth including in your employee benefits package.

A relevant life policy has many of the same features as a group life policy and is assessed similarly. It provides a death-in-service benefit that will pay out a lump sum to your employee's loved ones when the person covered dies.

How does relevant life insurance work?

Relevant life insurance provides death-in-service benefits to your employees without them paying a penny. Your business applies for the policy and pays the premiums, which then pays out a tax-free lump sum benefit to their beneficiaries if they die or are diagnosed with a terminal illness during their employment with you.

Relevant life insurance provides death-in-service benefits in the same way as a group life scheme. The amount it pays out on death is a multiple of your employee's salary, typically between two and four times their annual wage. It's essential to let your employees know about the amount their beneficiaries can expect to receive so that they consider their options and whether they may need to take out a separate, traditional life insurance policy.

When is relevant life insurance right for you?

A relevant life policy can be used as an alternative to a group life scheme or as a means to supplement it. Here are just a few reasons why a relevant life insurance plan could be the right choice for your business.

Your business doesn't have a group life scheme

Group life schemes are designed for businesses that want to provide life insurance to all employees. Whilst some insurers offer group life cover to companies with as few as two employees, many providers will only offer life insurance to larger corporations.

This could mean that your company or limited liability partnership is too small to qualify or that the quoted premiums aren't cost-effective. Relevant life insurance premiums tend to be lower, so offer a more cost-effective way for you to provide life insurance to your staff.

You want to provide additional tax-efficient employee life insurance

The amount that life insurance pays out is based on a multiple of your employee's salary. However, this could have negative tax implications for high-earning employees as any pension or life insurance benefits above an individual's pension lifetime allowance are taxable at 55%.

High earners with a healthy pension fund and group life insurance could pay more taxes. Relevant life insurance plans don't count towards this allowance, but group life cover does. Providing relevant life cover alongside group life cover, or as an alternative, is a tax-efficient way of providing additional cover to your high-earning employees.

You're a company director, contractor or sole trader

We should sound a note of caution here. Relevant life insurance isn't available to sole traders who are registered as self-employed with HMRC but haven't formed a limited company. However, relevant life cover is available if you have a one-person limited company that's too small to qualify for a group life insurance scheme.

Why not just take out a traditional life insurance policy?

If your business doesn't qualify for a group life scheme, you could decide to take out individual life insurance. The downside is that you'll pay the premiums out of your net income. Relevant life plans allow you to pay for your life insurance through the business, which is more tax-efficient as it's an allowable business expense that can be deducted from your tax bill. You can add new employees to your relevant life policy if your business grows.

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How much will relevant life insurance cost?

Insurance premiums are assessed based on the risk that someone will make a claim. To determine the price, insurers look at policy and personal factors affecting both the business and employees' individual circumstances. Here are a few factors that will influence the cost of your relevant life insurance.

The amount of cover

Relevant life insurance provides a payout to your employee's family equivalent to a multiple of their salary. You could use salaries as a starting point to calculate how much relevant life cover you need; however, this risks ignoring other sources of income.

Relevant life insurance can pay out up to fifteen times your total remuneration, which could be particularly valuable if you're a company director whose income includes a salary, dividends and an annual bonus.

How long the cover needs to last

Relevant life insurance only pays out during your employee's employment with you unless you opt to transfer the policy to them when they leave. This means you'll typically only need to provide relevant life cover until they retire. Most relevant life plans allow you to choose any age up to 75 years.

Do you want increasing or level cover?

The cover you choose influences the amount the policy will eventually pay out. With level cover, your premiums stay the same, and so does the amount the policy pays out. The main disadvantage is that the buying power of the payout may also reduce over time.

Increasing cover links the premiums and the payout to inflation, which means premiums will increase during the policy's life. The payout will keep pace with the cost of living as the policy will include more cover over the years.

Reviewable or guaranteed premiums?

Many insurance policies, such as your car insurance, are renewable annually. The process with relevant life policies is a little different. You can opt to fix your premiums or have them reviewed every few years.

Guaranteed premiums

As the name suggests, guaranteed premiums are fixed over the policy's life. This often means premiums are more expensive initially. However, they're generally cheaper over the whole term of the relevant life policy.

Reviewable premiums

Reviewable premiums can increase over time but are typically only reviewed every five years. Reviewable premiums are often more expensive in the long run, even though your initial quote will be lower than with guaranteed premiums. Your insurer will consider changes in your industry, the law, medical science, and overall claims experience to determine your revised premium.

Personal factors

How does relevant life insurance work when it comes to your personal circumstances? Policies are arranged on an individual and life of another basis, which means that your business is the policyholder, and your employee is the person covered. It's a personal policy which means that individual risk factors are a key consideration. Here are a few factors that your insurer will typically look at.

Your age

The amount relevant life insurance pays out is typically calculated as a multiple of your employee's salary. However, the maximum amount of cover you'll be offered is also assessed based on your employee's age. A new starter aged over 50 will be offered a lower multiple than a 20-year-old simply because an older person is more likely to make a claim.

Your health

Your insurer will look at your employee's overall health and whether they're a smoker. Your employee's family medical history may also be relevant if there are chronic conditions that could be inherited. These factors influence life expectancy and the likelihood that your employee will die during their working life.

The type of work you do

Every type of employment has risk factors. They could come from the sedentary lifestyle that can come with a desk job or the dangers associated with working on an oil rig. Insurers look at both the business you run and your employee's role. Some will refuse to offer you relevant life cover if they consider your occupation too high-risk.

Your employee's hobbies

Relevant life plans offer death-in-service benefits during your employee's working life. The policy will still pay out if they die outside work, so your insurers need to know if they have any hazardous hobbies.

Are there any exclusions on a relevant life insurance plan?

As we've already mentioned, some insurers won't offer insurance or may apply exclusions if the person covered has a high-risk occupation or hobby. There are other factors which may exclude you from coverage or prevent the policy from paying out.

Residence

Relevant life insurance is only available to businesses based in the UK and UK-resident employees, even if they work overseas.

Employment status

A relevant life policy only covers current employees and directors, so cover ends if someone leaves. In some circumstances, you may need to seek employment law advice to determine whether someone is still employed. For example, an employee who has given notice and been put on gardening leave may still be classed as an employee.

Terminal illness

Many relevant life insurance policies will pay out if you're diagnosed with a terminal illness, but there are often conditions relating to the type of illness covered. You'll need to show that your employee's life expectancy is less than a year before the policy will pay out.

Failure to disclose important information

It's pretty rare for a life insurance claim to be turned down. However, when they are, one of the most common reasons is a failure to disclose something important. That could be a medical condition, a dangerous hobby or something else.

It's also essential to keep your insurers updated with any changes. Whilst this may not affect your premiums, it reduces the risk that they'll refuse a claim because something relevant has changed.

The cause of death

Whilst most causes of death, from an accident to terminal illness, will be covered, there are exceptions. Some deaths are classed as self-inflicted, for example, suicide or death caused by drug or alcohol abuse or the individual's negligence or recklessness. Insurers may also deny a claim where the death resulted from involvement in crime, war or terrorist activity.

Tax implications of a relevant life insurance scheme

A relevant life insurance policy is a tax-efficient and cost-effective way to provide your employees with life insurance. Premiums on relevant life policies are, in most cases, an allowable expense for tax purposes and offer tax benefits to your employees, making relevant life insurance a tax-efficient alternative to group life schemes.

Your policy needs to meet a few conditions to qualify for tax relief and for premiums to be considered a tax-deductible business expense.

Business tax benefits

When you take out a relevant life policy for your employees, you're the policyholder, which means you can get tax relief on premiums and treat them as an allowable expense for corporation tax. Neither you nor your employees will need to pay National Insurance contributions on premiums which means it's a cost-effective way of reducing both the business and employee tax bills.

What conditions does the policy need to fulfil?

The criteria that relevant life insurance needs to meet aim to ensure that it can't be used for business protection or tax avoidance. It places some limitations on the policy terms.

It can only offer life cover

This might seem pretty obvious. However, some insurers offer relevant life insurance with disability or critical illness cover as part of the policy. If you include critical illness cover as part of the same policy, you'll lose the tax benefits of relevant life insurance.

There's an age limit

Your relevant life insurance can only offer cover to an employee until they're 75.

No cash value

When you stop paying the premiums or your employee leaves, their coverage ends. You can opt to transfer the policy to them or their new employer, but you can't offer a cash surrender value if you want to claim the tax benefits of relevant life cover.

Where the benefits are paid

To qualify for tax relief, the life insurance payout must be paid to an individual, a charity, or a trust. Most relevant life insurance is automatically set out to pay into a trust to comply with this condition. It's also more tax-efficient for your employee and their beneficiaries.

Business protection

The main reason for these conditions is that relevant life insurance can't be used for business protection or tax avoidance. HMRC would consider it a red flag if the death in service benefit was paid to beneficiaries other than an employee's dependents or family members. Whilst you can take out key person cover to minimise the impact of the death of a shareholder or board member, relevant life cover can't be used for key person purposes as it can't be paid to a limited company.

Advantages for employees

When you include relevant life insurance as part of your employee benefits package, you can also reduce their tax liability.

reduced income tax and national insurance contributions

Relevant life cover isn't treated as a benefit in kind, so employees won't pay additional income tax or National Insurance contributions on it as they might with health insurance.

inheritance tax

When a new policy is set up, it includes a trust which means that the policy falls outside of your estate for inheritance tax purposes. It means that beneficiaries can receive the payout without paying any inheritance tax on it. This makes it tax efficient, particularly if an individual's estate is near the nil rate band threshold. In some cases, it could mean that beneficiaries don't have to pay any inheritance tax.

The pension lifetime allowance

The pension lifetime allowance is a crucial consideration for company directors and employees, particularly if they're high earners. The allowance is the amount you can receive from your pension and life insurance tax-free. It's currently set at £1,073,100, so if you receive more than that, you'll need to pay income tax at 55% on any payments over the allowance.

What counts towards the lifetime allowance?

Any private pension or group life scheme will count towards your lifetime allowance. If you've had various jobs with a company pension scheme, it's worth speaking to an independent financial adviser for advice on tax-efficient ways to manage your pension pots.

What about relevant life cover?

The good news is that a relevant life policy doesn't count towards your allowance as it's held in trust. It means that a relevant life policy is a more tax-efficient way of offering life cover than a group scheme.

How will employees know how much of their allowance they've used?

If your employee has a single pension provider, they can ask how much of their allowance they've used. If you set up a group life scheme, this is registered with HMRC in the same way as your pension scheme, so all the information is together. Your pension provider may also ask for information on any other pension schemes. An independent financial adviser may also be able to help. You can find out more about tax and the lifetime allowance here.

Getting professional advice

If you want to talk to an expert about getting the right life insurance for your business, don't hesitate to contact us for a comparison quote.