Smaller businesses with five or fewer employees are typically not large enough to offer a group life insurance plan. In practise, this implies that employees must either purchase their own plans and pay for them out of their post-tax income, or make no provision at all.
However, if you own or work for a small limited company, you can obtain relevant life insurance coverage through your firm and benefit from tax breaks and large savings. This is where relevant life insurance comes into play. Let’s talk about the relevant life insurance policy, the plan, and the rewards.
What is Relevant Life Insurance?
A relevant life insurance policy is a death-in-service benefit that your employer offers. Your company pays for it and sets it up. It provides a tax-free lump sum if you die or are diagnosed with a terminal illness while still working for the company.
What Is the Process of Relevant Life Insurance?
An individual is evaluated in the same way a standard life insurance policy is in terms of how much coverage is required, their health, age, and lifestyle. Your mortgage payments, salary, and other factors, such as personal bills, may all influence the amount you request. This generates a premium, but instead of the individual paying for the policy, the corporation does.
If the individual covered dies while working for the company, the corporation pays a lump sum, tax-free, to their beneficiaries, who are usually family members. Policies can be purchased as a benefit for both employees and business owners and directors. The cover can be a useful perk, but the relevant life cover taxation is also quite generous. Relevant life plans can either be for a fixed sum, known as a level payout, or they can be linked to inflation so that the payout represents the cost of living at the time it is made.
This would also cause premiums to rise in tandem with inflation. Some policies may also guarantee increased choices, such as the ability to cover a higher mortgage or a pay raise. It is not recognised as a benefit in kind, therefore the insured owes no income tax, however, the firm can deduct the premiums as an expense to lower their corporation tax burden. Furthermore, because the policy is written in trust, the payout to beneficiaries is tax-free. Providers will put different restrictions on the amounts of coverage, therefore, many people use it alongside death-in-service policies to supplement their insurance.
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Death-in-service coverage typically gives a tax-free reimbursement of two to four times your income if you die while working for the company. A relevant life insurance policy, on the other hand, may provide additional coverage. These policies may not cover all of your loved one’s expenses, such as a mortgage or daycare, so it is often worth considering supplementing with your own life insurance.
Furthermore, if you quit a company that provides the death-in-service benefit, you will lose this benefit; however, you may be able to take care of your own relevant life insurance and pay your own premiums. You may even bring it with you to your new job and ask if they will pay for it as part of your remuneration package.
Relevant Life Insurance Cover Rules and Eligibility Requirements
Businesses that purchase relevant life insurance plans for their employees must normally agree to certain norms and regulations.
- Pay regular monthly or annual premiums for the term’s duration.
- When setting up the policy or filing a claim, provide accurate information about the covered individual and their beneficiaries. This may include details about their health, age, and lifestyle, as well as their job in the company.
- Inform the insured employee that if their circumstances change throughout the term, they must contact the insurance provider. This could be due to health issues or a change in their work circumstances at the company.
- Inform the insurance provider of any claims that must be made within the timeframe stipulated in the plan’s terms and conditions.
- Policies only provide a lump sum payout payable before the age of a set number of years (typically 75)
- The policy will have no cash value.
- Terminal illness benefits can be provided, however, they are normally only applicable if the insured individual is employed by the employer at the time of diagnosis.
The preceding is meant to provide a picture of the typical rules and requirements that businesses must agree to when purchasing a relevant life insurance plan. Many plans include extra terms that may limit the situations in which they payout, so always read the fine print or contact an expert if you have any questions.
Who is Eligible for Relevant Life Cover?
If you are…, you can apply for relevant life insurance on behalf of one or more of your employees.
- A sole proprietorship
- Partnership
- A limited liability company
- A limited liability business
- A non-profit organisation
The following are typically not covered by a relevant life insurance policy:
- Sole proprietors
- A partnership’s equity partners
- A participant in a limited liability partnership
All of the aforementioned are not considered workers and hence do not fit the criteria used by the majority of UK-relevant life insurance carriers.
Furthermore, employees can only be covered if they work for the company on a PAYE basis and are UK residents.
Read Also: Sole Trader Public Liability Insurance: Buying Guide
Is there an upper age limit?
Yes. Most relevant life insurance policies indicate that coverage cannot surpass the insured employee’s 75th birthday. Make an inquiry if you are a firm wishing to give protection or benefits to someone beyond that age, as there may be alternatives to consider. Our independent financial advisors have access to the whole market, so they can lay out all of your alternatives and assist you in selecting the best protection policy for your circumstances.
What are the Benefits of having Relevant Life Insurance?
Relevant life insurance is a cost-effective solution to give employees with life insurance with terminal disease coverage advantages. Including a relevant life insurance policy as part of a comprehensive benefits package will help your company attract new employees, retain and reward current employees, and communicate the message that you are a responsible and caring employer.
Relevant life insurance may also help employers decrease their tax obligation, so it can be a cost-effective method for smaller businesses to compete with larger competitors when it comes to attracting staff. Premiums are typically classified as a business expense and thus qualify for a tax deduction. Maintaining the plan in trust allows an employee to plan for inheritance tax if an estate is worth more than the current inheritance tax level.
| For the employee | For the employer |
| Provides peace of mind | Tax-efficient |
| Tax-free payout | Great employee benefit – even for small businesses |
| Paid for by the employer | Affordable cover |
What Is the Cost of Relevant Life Insurance?
The cost of Relevant Life Cover is determined by a variety of factors. Some major policy factors that you can influence include:
- Cover amount
- Cover length
Other personal aspects over which you have less control but which will nevertheless have an impact on the cost of your policy are:
- Age
- Health status at the moment
- Status as a smoker
- Lifestyle and risky activities
- Ancestral history
We obtained quotations for three people aged 25, 35, and 45 using our Relevant Life Insurance Calculator.
We made the following assumptions in order to calculate these premiums:
- The individual is a nonsmoker who is in good health.
- They work as architects.
- They want the company to pay for £250,000 in level life insurance over a 25-year period.
| Age | Monthly Premium |
| 25 Years Old | £7.50 |
| 35 Years Old | £13.86 |
| 45 Years Old | £29.05 |
Calculating Your Savings Potential With Relevant Life Insurance
Consider a Life Insurance policy that costs £100 per month on a personal basis. You’ve already paid taxes and national insurance payments on the money you’re using to pay your premiums. This means that a higher-rate taxpayer must make £196.21 in business before they can afford to pay a £100 Life Insurance premium.
Relevant Life Insurance, on the other hand, is paid before HMRC deducts taxes and national insurance contributions. A policy with the same monthly payment as a personal plan might thus save up to 49 percent.
| Personal Life Cover | Relevant Life Policy | |
| Cost to Individual | ||
| Monthly Premium | £100.00 | £0.00 |
| Employee NI Contribution | £3.45 | £0.00 |
| Income Tax | £68.97 | £0.00 |
| Cost to Business | ||
| Premium | £0.00 | £100.00 |
| Employer NI Contributions | £23.79 | £0.00 |
| Gross Cost | £196.21 | £100.00 |
| Corporation Tax | -£37.28 | -£19.00 |
| Total Cost | £158.93 | £81.00 |
| Total Savings | 49.03% |
What are the boundaries?
Most relevant life insurance policies include the following cover limits:
- Life Only Cover: Normally, critical illness and disability coverage would have to be purchased separately.
- Age restrictions: Most carriers will not cover employees over the age of 75.
There is no surrender value in the majority of relevant life plans.
Benefits must be paid to an individual or a charitable organisation. Trusts are also appropriate because they help providers confirm that the policy is not being put up to evade taxes.
Who are the Greatest Relevant Life Insurance Service Providers?
This is a subjective question because the most relevant life insurance provider for one firm may not be appropriate for another. Nonetheless, Aviva, Legal & General, Vitality, Scottish Widows, and Royal London are market leaders in this industry. Each of these insurers will compute your rates differently, measuring the level of risk involved in the agreement by considering the employee’s age, health, and lifestyle.
Some cover companies, for example, may demand higher premiums if the employee has recently begun smoking, but others may be less worried. Policy costs might vary greatly, which is why it’s best to consult with an expert before applying.
What is the Distinction Between a Relevant Life Insurance Plan and Death in Service Benefits?
- Relevant life plans differ from death in service benefits in a few ways:
- The amount of cover is typically much higher than death in service, ranging between two and twelve times annual pay.
- The cover can be tailored to the individual, so it is not as broad as a death in service.
- Because relevant life plans do not count towards the lifetime allowance, they can be more tax-efficient for high-earning employees. This is due to the fact that, unlike many group death-in-service schemes, relevant life plans are not part of a pension system.
Unlike group life insurance programmes, you don’t need a large number of employees to set up relevant life plans, which makes it an excellent option for sole proprietors.
As a result, relevant life plans might be a good complement to death-in-service cover for larger organisations. And the superior choice for small and medium-sized businesses.
Relevant Life Insurance FAQ’s
Can relevant life cover include critical illness?
Yes, it’s conceivable. Most relevant life insurance policies currently include a provision to pay out if an employee is diagnosed with a terminal illness with a life expectancy of fewer than 12 months, in addition to lump sum life cover.
Can relevant life be decreasing term?
If a relevant life cover policy has a diminishing term, this means that the lump sum amount received by the beneficiaries will decrease steadily over the period. This form of cover may be appropriate if the insured has a declining debt, such as a mortgage.
Can relevant life be used for shareholder protection?
Because of the tax breaks provided by HMRC, and because it is intended to give financial support to an employee’s family in the case of their death, relevant life cover is not normally judged appropriate for shareholders wanting to insure each other’s ownership inside a corporation.
