How life insurance can work for you, not just in terms of providing a financial safety net but also from a tax perspective, is something few contemplate. This post will delve into the relevance of life cover and how it can function as an expense.
Exploring Life Insurance
The concept of life insurance is often alien territory until someone starts a family or buys a home. The imperative of having financial protection suddenly becomes clear. A life insurance policy is an agreement where you regularly pay premiums to the insurance company. In exchange, they promise to provide a lump sum payment to your beneficiaries if you pass away while the policy is active.
This gives your loved ones financial support during a difficult time. Though no one likes to think about their own mortality, life insurance can offer peace of mind knowing you’ve helped protect your family’s future if something unexpected were to happen. This type of arrangement helps provide financial security for dependents.
However, not all individuals fully consider the tax implications associated with life insurance policies. There are options that offer attractive tax advantages; one such option is relevant life cover.
Defining Relevant Life Cover
Relevant life cover is a type of term assurance plan available to employers for providing individual death-in-service benefits. Relevant, in this sense, refers to being suitable or fitting for a particular person, purpose or situation.
This type of cover helps to ensure employees’ beneficiaries receive substantial financial support if they die while under contract with their employer. What sets relevant life cover apart is its unique taxation structure: premiums are typically deductible as a business expense.
Hence, relevant life presents an avenue whereby your life insurance can effectively become an expense rather than a personal cost.
Bizassured.co.uk offers excellent insight into this less-familiar aspect of life insurance. They explain that the policy must be written in trust with the employee’s chosen beneficiaries, thus avoiding inheritance tax and ensuring the maximum payout reaches the intended recipients.
They underline that both employers and employees can benefit, as companies get to deduct premiums as a business expense, and employees receive their benefits free from income tax, inheritance tax, and potentially even corporation tax.
What’s more, they are keen to stress that this offers a desirable way to supplement an employee benefits package and can aid in recruiting and retaining top talent.
Benefits of Relevant Life
The key advantages of relevant life policies primarily revolve around taxation. Premiums are usually tax deductible for employers as a business expense, making it a cost-effective benefit.
The tax incentives make it feasible for companies to offer coverage to employees while managing costs. Also, beneficiaries are spared from potential income tax burdens on payouts. This feature isn’t standard with most other life insurance plans.
You’re dealing with substantial savings when you consider how much one can save on National Insurance contributions. The nature of this cover also provides an added level of financial security for your family or dependents should you pass away in service.
Deducting Premiums For Tax
Premiums for relevant life cover are usually considered as a trading expense, which makes them tax-deductible. The policy must not include any critical illness cover or any other benefits for the employee for it to qualify.
In addition to this, since the premiums are paid by your company rather than out of your pocket, there aren’t any National Insurance contributions or income tax to worry about. This provision allows relevant life cover to be highly tax-efficient compared to most conventional life insurance policies.
Eligibility For Relevant Life
Who are the potential beneficiaries of the relevant life policy? Well, most UK-based companies, including Limited Liability Partnerships (LLP) and sole traders, can avail tax-efficient life insurance by opting for a relevant life policy.
However, not every employee is eligible. Usually, the policy is ideal for employees within 18-75 years, but the exact age range may vary for different providers. It is also imperative to note that directors of small enterprises, high earning employees who have exhausted their pension lifetime allowance or those who do not qualify for a group scheme can also apply.
Terms and Conditions Applied
Every insurance policy comes with specific terms and conditions that dictate its operation. relevant life policy is no different. The cover should strictly be on a single-life basis – it needs to terminate upon reaching specified age limit or retirement, whichever comes first.
The policy should not provide ongoing benefits post retirement and only caters to death benefits within the stated service term. The lump sum death benefit payout should not exceed the lifetime allowance for pension savings (£1,073,100 for the tax year 2021/22).
Prevalence of Policy Exclusions
Like other life insurance policies, a relevant life policy may also include exclusions, things that might prevent your policy from paying out if you die under certain circumstances. It’s critical to fully understand these exclusions before purchasing the cover.
This policy does not cover terminal illness benefit or critical illness. Therefore, early diagnoses of potentially life-threatening conditions would not qualify for an early payout. The sole purpose is to offer financial support to beneficiaries upon the death of the insured.
Payout Process Explained
A payout occurs when an insured person dies while under contract with their employer. The insurer pays the lump-sum death benefit directly to the trust. The trustees then distribute this payout to the nominated beneficiaries as stated in the trust document.
Remember that since payouts do not pass through the estate of the deceased, they automatically become free from inheritance tax.
Filing a Claim Procedure
Filing a claim under a relevant life policy is straightforward. Upon the death of an insured person, the administrator or trustees must alert the insurance provider as quickly as possible. They’ll need to provide necessary documentation like certified copies of death certificates and relevant claim forms.
The insurer will then authenticate all information. If a claim is authorised, funds will be paid directly into the trust.
Importance of Transparency
To ensure your relevant life policy accurately protects the insured individual(s), it’s imperative to be completely transparent about all details, right from personal to health information during the application process.
Deliberate or inadvertent nondisclosure may give rise to complications at claim stage which might result in declined claims or reduction in payout amount – defeating the purpose of having insurance.
Situations Favoring Relevant Life
Certain scenarios lend themselves particularly well to relevant life. Small businesses unable to qualify for group schemes but wanting to provide an attractive benefits package to their staff can greatly benefit from relevant life.
Similarly, high net-worth individuals who’ve exhausted their annual or lifetime pension savings allowances can utilise this plan as an efficient way of providing family protection outside of those allowances.
Updating Policy and Beneficiaries
You should review your policy and beneficiaries periodically, especially after major life events such as the birth of a child, a marriage or a costly divorce. It is also crucial to keep your policy updated with your most recent beneficiaries.
Doing so helps ensure that the policy benefits go to the right individuals in the event of death and serve their intended purpose.
A Brief Summing Up
Relevant life practices dual functionality – it provides life coverage for your employees while simultaneously working as a tax-efficient tool. Any business looking for a win-win situation should consider integrating relevant life into its employee benefits plan.