Relevant Life: Life insurance savings for business owners
For a business owner or director paying personally for life insurance, or a small business wanting to offer life insurance to employees, a Relevant Life Policy (RLP) can reduce the cost of life insurance by up to nearly 50% through savings in tax and national insurance.
How does it work?
It works in the same way as a personal life insurance policy, except that it is taken out and paid for by the business, rather than by the employee, to provide life insurance for the employee and their dependants.
A lump sum is paid to the employee’s dependants if they die, or to the employee if diagnosed with a terminal illness, whilst employed during the policy term.
It differs from group life insurance in that cover is provided on an individual basis, rather than for a group of employees.
An RLP does not provide cover for the benefit of the business itself – specific business protection policies are available for such needs.
Who is an RLP suitable for?
It could be suitable for any salaried employee for whom a business wants to provide life insurance benefits, whether or not they are a director. Examples could include:
- Small businesses
Small businesses may struggle to get group life insurance at a competitive rate, or at all. An RLP is a way for a business to provide life insurance and still take advantage of the tax benefits available (see below).
- Additional life cover
Under group life insurance arrangements, cover is often limited to a lump sum of 4 x salary. Depending on the age of the insured, an RLP can provide up to 25 x salary.
- Employee at or near pension lifetime allowance
An RLP payout does not count towards an individual’s lifetime allowance for pension purposes. Under a group life insurance scheme, a payout will count towards the employee’s lifetime pension allowance, currently capped at £1.25 million. Any amount above this is taxed at 55% (under current legislation).
What are the tax benefits?
Premiums for an RLP are not treated as a benefit in kind on the employee. This means that the employee (which can include salaried directors) does not pay Income Tax or National Insurance on the premiums paid by the business. This can represent a significant saving for the employee, particularly where they are a higher or additional rate taxpayer.
For the business, HMRC views the premium as an allowable business expense, thereby making it efficient from a Corporation Tax viewpoint too.
When it comes to making a payout on death or terminal illness, as the relevant life policy is written in trust, the lump sum will be free of Income Tax and, usually, Inheritance Tax.
Can any additional protection or healthcare benefits be provided with the same tax treatment?
To benefit from favourable tax treatment, the policy must be a pure protection policy, meaning it must have no surrender value, and can only provide life insurance (i.e. pay out a lump sum on death or terminal illness) and no other benefit – it cannot therefore provide critical illness or income protection benefits.
However, many RLPs come with additional benefits such as medical support services, although these will vary from provider to provider.
So, whilst group life insurance may dominate the death-in-service market and continue to do so, depending on the circumstances of an individual or business, the Relevant Life Policy is most certainly a relevant alternative, or even a complementary option.