MORTGAGE BROKER IN ESSEX, LONDON & SOUTH EAST
RELEVANT LIFE COVER
Relevant Life Cover offers tax-efficient death-in-service benefits for businesses, providing employees with valuable life insurance through a company-paid arrangement.
Key Features
Premiums are typically tax-deductible as a business expense
No benefit-in-kind tax liability for employees on premiums paid
Payments don't count toward pension annual or lifetime allowances
Tax-free lump sum paid directly to employee's beneficiaries
Available to directors as well as employees, provided they receive PAYE income
What Is Relevant Life Cover?
Relevant Life Cover represents one of the most tax-advantageous protection solutions available in the UK market, providing businesses with an efficient mechanism to offer valuable death-in-service benefits to employees. This specialised form of life insurance is particularly valuable for small to medium enterprises that don't have enough employees to establish a group life scheme but wish to provide comparable benefits to those offered by larger organisations.
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The fundamental structure of Relevant Life Cover involves the company taking out and paying for an individual life policy on behalf of an employee. The policy is written into trust, ensuring that upon the employee's death, the tax-free lump sum is paid directly to their nominated beneficiaries rather than to the business. This arrangement creates a clear separation that satisfies HMRC requirements for the premiums to receive favourable tax treatment.
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The tax efficiency of Relevant Life Cover represents its principal advantage over personally arranged life insurance. Premiums are typically allowable as a business expense, potentially reducing the company's corporation tax liability. Simultaneously, these payments aren't classified as a benefit-in-kind for the employee, meaning they avoid income tax and National Insurance contributions that would apply to traditional salary increases or bonuses of equivalent value. For higher-rate taxpayers particularly, this arrangement can represent a significant cost saving compared to personally funded protection.
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Another noteworthy advantage is that Relevant Life Cover doesn't count toward the employee's annual or lifetime pension allowances. For individuals approaching these thresholds, especially following recent reductions to the Lifetime Allowance, this creates a valuable opportunity to maintain comprehensive life coverage without compromising pension planning options. The death benefit similarly falls outside the pension framework, avoiding potential taxes that might apply to benefits paid from pension arrangements.
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Relevant Life policies typically include a terminal illness benefit as standard, providing the full sum assured if the employee is diagnosed with a condition expected to cause death within 12 months. This advance payment can provide crucial financial support during exceptionally challenging times, allowing families to focus on personal matters rather than financial pressures. Some policies also offer continuation options that allow employees to maintain coverage if they leave the company, converting to a personal policy without additional medical underwriting.
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While Relevant Life Cover offers substantial benefits, certain limitations must be considered. The coverage specifically addresses death and terminal illness benefits only—critical illness protection cannot be included within this tax-advantaged structure. Additionally, the policy must end by the employee's 75th birthday (though many terminate at earlier retirement ages), and the death benefit must be paid as a lump sum rather than income. Directors can qualify as employees for this purpose, provided they receive PAYE remuneration, making this solution particularly valuable for owner-managed businesses.
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For businesses considering implementing Relevant Life Cover, proper trust arrangements are absolutely essential to maintain tax efficiency. The policy must be written into an appropriate Relevant Life trust from inception, with clear separation between the business paying the premiums and the beneficiaries receiving the benefits. This typically involves establishing the employee's family members as beneficiaries, with the company having no beneficial interest in the policy proceeds.
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Regular review of Relevant Life Cover arrangements is advisable following significant changes in employee circumstances such as marriage, childbirth, salary adjustments, or property purchases that might necessitate increases in coverage amounts. Similarly, changes to tax regulations affecting either business expenses or benefits in kind may impact the relative advantages of this approach compared to alternatives, making periodic reassessment of the arrangement prudent.
