As a small business policy, relevant life insurance can be extremely beneficial for limited company directors and employees alike.
In this jargon-free guide, you'll learn what relevant life cover is, how it works, what the key benefits and features are, and much more.
- What is relevant life insurance?
- How does relevant life insurance work?
- Who is eligible for relevant life cover?
- What are the key features of a relevant life policy?
- What are the key benefits of relevant life cover?
- Can I get critical illness cover with relevant life?
- How much does relevant life insurance insurance cost?
- Getting a quote
What is relevant life insurance?
Relevant life insurance is tax-efficient small business insurance that provides a death-in-service benefit for an individual company director or other employee.
Upon the insured person's death or diagnosis of terminal illness, relevant life cover pays a tax-free lump sum benefit to their family or other designated beneficiaries.
Life insurance for directors, paid for by your business.
Unlike a personal life insurance policy, relevant life cover is paid for by a business, and provides significant tax advantages for both employer and employee.
It's a single-life policy, so needs to be taken out for each employee individually.
Relevant life is therefore suitable for small businesses with less than five employees. Larger employers tend to take out Group Life Insurance instead.
Crucially, relevant life cover can be a powerful recruitment tool not just for new employees but as an aid to employee retention as well.
How does relevant life insurance work?
- The employer is the policyholder, selects the desired benefit level, and pays the monthly premium.
- The benefit level is usually set at a multiple of current income. For company directors, income is based on salary, dividends and P11D benefits-in-kind as declared in their latest tax calculation.
- The employee or director (the life covered) must receive their salary through PAYE payroll.
- The RLC policy is written into a trust and the employee or limited company director specifies who they'd like as their trustees and beneficiaries.
- In the event of the employee passing away during their employment, the trustees make a claim and the insurer pays the tax-free lump sum.
- The trustees distribute the benefit amount to the beneficiaries tax-free in accordance with the employee's wishes when setting up the trust.
- The policy cover is only payable if the individual is employed by the business at the point of passing away or terminal illness diagnosis with less than one year to live. And no later than their 75th birthday.
- The benefit is only paid once, after which the policy is terminated.
- The policy has no cash-in or surrender value.
What happens to the policy if an employee leaves the business?
If an employee leaves their employment, either to work elsewhere or retire, they are no longer covered.
The policy is then suspended. However, it can be transferred to the employee's new employer, and as long as the premiums are paid, the relevant life status will be maintained.
Alternatively, the employee can take out their own life insurance policy with the same insurer. The policy won't have relevant life status, and the premium will be determined at the point of taking it out.
Terminal illness benefit is nearly always included as standard
Nearly all relevant life policies include terminal illness benefit.
This means that if a medical professional provides the employee or company director with a terminal illness diagnosis and less than 12 months to live, the policy will pay out the full lump sum.
How does a designated trust work?
To prevent tax or insurance fraud, the use of a designated trust is a mandatory requirement for a relevant life policy.
A discretionary trust is a legal arrangement whereby nominated trustees are engaged to administer the policy before and during any claim.
The benefit funds are received and held by the trust before being distributed to the employee's beneficiaries.
The good news is a trust is free, quick and easy to set up during the application process. Your protection adviser will undertake the trust creation on your behalf.
Using a discretionary trust has a few key benefits.
- The lump sum falls outside the deceased's estate for Inheritance Tax purposes so no tax is due.
- As there is no need to wait for a Grant of Probate to be issued, the beneficiaries can receive the benefit quickly.
- If necessary, the benefit can also be used to pay any Inheritance Tax due on the employee's estate. Allowing beneficiaries to obtain early release of property and other assets.
There are three parties involved in the creation of a trust:
- The Settlor. The employer who places the policy into trust
- The Trustees. Usually family members and/or other trusted individuals chosen by the employee.
- The beneficiaries. The people who receive the benefit of the policy payout proceeds, usually family members.
As a discretionary trust, the trustees have some flexibility about the release of funds. For example, if the beneficiary is a child.
But the key point is they are legally obligated to act in the best interests of the beneficiaries.