Analysis: Relevant Life Cover in small businesses

Steven Ritchie, Independent Financial Adviser, looks at Relevant Life Cover.

If you are a small business owner then there is a smarter way to buy life insurance for yourself and your key employees.

What is a Relevant Life Policy?

A Relevant Life Policy is a term assurance plan which is applied for by the employer on the life of the employee. The plan can only provide lump sum death benefits and must be written under trust from commencement. This provides death in service cover without the need for a group life scheme for the benefit of the employee’s family.

What do they do?

Relevant Life Policies provide life cover for the benefit of employee's and director’s dependants and all benefits are paid through a discretionary trust. The plan must be taken out and paid for by the employer.

Who is allowed to have this type of plan?

Any employee of a business, including directors. The business can be a limited company, a limited liability partnership, a partnership, a charity or a sole trader.

Why are they so tax efficient?

With a Relevant Life Plan the business pays the premiums, not the person who’s covered. This means it’s highly tax efficient for the business because the payments are normally tax deductable. And its highly tax efficient for the people covered because the tax man doesn’t consider the payments a benefit in kind.

Types of cover

Cover can be level, increasing or decreasing.

Benefits

All benefits are payable free of Income Tax and relevant life policy benefits do not form part of the employee's lifetime allowance for pensions.

Restrictions

To qualify as a Relevant Life Policy and become eligible for the associated tax benefits there are certain legislative requirements:

• The plan must only provide lump sum death benefit. i.e. no disability, critical illness or waiver of premium benefits allowed;
• The term selected cannot exceed the 75th birthday of the employee;
• No surrender value is allowed; and
• Benefits must be payable to an individual or charity, or to a trust for the benefit of an individual or charity. The plan must be written under a Relevant Life Policy trust to ensure this requirement is met.