Relevant Life Cover

Who is most likely to benefit
from a relevant life plan?

An employer that does not have a sufficient number of employees for a group scheme, but would like to offer a death-in-service benefit to a small number of employees (or to just one or two individuals, such as directors). In the event, an employer could wish to provide cover that is not in line with their current group scheme. It is particularly well suited to Limited Companies that have a small number of employees.

If an employee has a significant pension fund, and is likely to exceed their pension lifetime allowance, this could incur charges before retirement. A relevant life plan would not incur a lifetime allowance charge, as current tax rules do not count this towards the annual or lifetime pension allowance. For any advice relating to pension related activities, it is recommended to seek advice from an independent financial adviser on pension related need areas.

Life cover from a Registered Group Life Scheme usually forms part of the total pensions allowance and, therefore, could see a sizeable amount of the allowance being used up with life cover benefits. A Registered Group Life Scheme is the most common way to set up Group Life Insurance and these fall under pension legislation rather than Life Insurance legislation. This means that any lump sum pay-out is aggregated and added to benefits from other HMRC registered schemes, such as pension schemes.

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Disclaimer

Please note: these plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse. 

How much
cover can I get?

The maximum amount of cover available will usually depend on the employee’s age and level of remuneration. It may also depend on any other life cover that is in place for the employee.

Most insurers will allow a multiple of remuneration. The size of the multiple will be determined by age and any additional cover already in place. Generally, insurers will go to a maximum of around 25 times remuneration.

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When are relevant life plans not beneficial?

  • When there isn’t an employer / employee relationship, such as sole traders, equity partners of a partnership or equity member of a Limited Liability Partnership
  • When the intention is to insure a business loan, shareholding in a business, a key person, or it is otherwise intended for the pay-out to benefit the business
  • When the intention is primarily to avoid taxes and the pay-out was intended to go to business beneficiaries as co-shareholder.
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Relevant life example:

Mr Smith is an employee of ABC limited and has a private life insurance policy for £750,000 that is due to expire on his 70th birthday. He currently pays £100 a month for this policy. The below example provides a comparison between a relevant life policy and an ordinary life policy:

Ordinary life policy £100
Employee gross salary increase £147.06
Employee National insurance £17.65
Employee Income tax £29.41
Net cost £135.56
Relevant Life Policy £100
Corporation tax relief £19.00
Net Cost £81.00

Disclaimer

This information is based on our present understanding of current law and HM Revenue & Customs practice for the tax year 2021/22. It may be affected by future changes and individual circumstances. This is illustrative only. This example assumes no dividends were taken, corporate tax relief at 19%, income tax at 20% and national insurance band at 12%. The payments employers make are not subject to Income Tax and are not normally assessable on the employee as a benefit in kind. These are gross earnings required to leave sufficient net income to pay the premium. The tax treatment of Relevant Life policies ultimately rests with the local Inspector of Taxes and is always under review.

So, if Mr Smith had a relevant life plan, it would be a considerable saving of around 40%.

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