It’s natural to want to protect your family. Life Insurance can help give you peace of mind that, should the worse happen, they’ll be financially secure. But there could be a way that’s more tax-efficient to provide security for your loved ones. Relevant Life Insurance is a way for business owners to provide effective cover for themselves and employees, benefitting the company, members and potential beneficiaries in the process.
Before we delve into why a Relevant Life Policy can be an efficient alternative; why is Life Insurance important at all?
In simple terms, Life Insurance is a policy that pays out in the event of your death. It’s not something anyone wants to think about. However, it’s a policy that can provide your loved ones with increased financial security during what will be a difficult time. The money received from a Life Insurance policy could, for example, be used to pay off the mortgage, pay for a child’s education and ensure living costs are taken care of while your family grieves. It can give you peace of mind that should something happen to you, your family will be financially secure.
Life Insurance can also be used to leave an inheritance. By naming your beneficiaries you can ensure that something is left behind to those you care about, paving the way for greater financial security for them.
What is a Relevant Life Policy?
A Relevant Life Policy is very similar to traditional Life Insurance; it will pay out a pre-defined sum on your death to named beneficiaries. However, the key difference is that it’s offered through a company as a form of death-in-service benefit. The policy is paid for by the company, but pays out to an employee’s or director’s beneficiaries on death.
A Relevant Life Policy may be attractive if you’re a:
- Company director that wants life cover to protect family or to complement existing Life Insurance policies
- Business owner that wants to offer death-in-service benefits to staff members
All Life Insurance policies come with a cost. This premium will be based on a range of factors, including the level of cover desired, age, health and lifestyle choices, such as whether you smoke cigarettes. While it may seem like an expense that isn’t necessary, when you consider the security that Life Insurance offers, it’s typically one that’s worthwhile.
How can a Relevant Life Policy be used to reduce costs?
When you compare a Relevant Life Policy to a traditional Life Insurance policy, it will provide benefits at a lower cost thanks to being tax-efficient. First, when a company pays the premiums towards a Relevant Life Policy, they’re usually considered allowable for deductions and not benefits in kind. This means the premiums can be treated as business expenses and you’re able to use them to deduct against Corporation Tax, reducing the amount paid.
For holders of a Relevant Life Policy, no National Insurance or Income Tax is liable on the premiums. Premiums also don’t form part of an individual’s Annual Allowance for pension savings, this is in contrast to Group Life Schemes which do and can result in a tax bill if the threshold is crossed. For high earners who have a tapered Annual Allowance, this can make a Relevant Life Policy particularly attractive.
The tax-efficient benefits can make a big difference to the amount you pay for the financial security a Relevant Life Policy offers. An example created by Zurich demonstrates why using Relevant Life Policy may be more prudent as a company director. According to the insurer:
Mr A is a shareholding director that pays £200 a month for his life cover from his salary after tax. As a higher rate taxpayer, he pays 40% Income Tax on the higher part of his salary, as well as the extra 2% rate above the upper earnings limit for National Insurance.
Once the pre-tax income needed to fund the £200 life cover policy is considered, as well as employer National Insurance contributions, it’s estimated to cost Mr A and his company £317.86. In contrast, using a Relevant Life Policy could reduce this to £162.00, a saving of £155.86 a month.
The above example assumes Mr A pays his premiums from his higher marginal rate of tax, and his salary, National Insurance contributions and Relevant Life Policy premiums are all allowable deductions for Corporation Tax.
For beneficiaries, a Relevant Life Policy has the advantage of being paid tax-free, including usually being exempt from Inheritance Tax. This means you can rest assured that those you want to benefit from a Relevant Life Policy will receive the sum specified should you die.
Additional benefits of a Relevant Life Policy
In addition to costing less, a Relevant Life Policy can also have other benefits:
- Compared to the alternative of a Group Life Scheme, a Relevant Life Policy can provide a lower cost and less complex solution, this is particularly true if you have few or even no employees
- A Relevant Life Policy is an attractive perk for employees that can help attract and retain key members of staff.
- It allows business owners to cover themselves using their business rather than personal income
If you’d like to learn more about Relevant Life Policy with a specialist Financial Planner please contact Juniper Wealth Management here