If you’re considering buying a life insurance policy to protect your family, relevant life cover is a very tax-efficient way of taking out cover via your own limited company.
What is Relevant Life Insurance?
This type of protection is similar to a ‘death in service’ policy often provided to traditional employees. A Relevant Life Policy (RLP) is a tax-efficient way to provide a cash sum to employees of private limited companies (such as contractors) should they die.
The policy is paid for by your limited company, written in trust, and the premiums are an allowable business expense. It is particularly attractive to small company owners who don’t have the resources or the need to set up a group life scheme.
Here are 8 key benefits of Relevant Life insurance.
Significant tax relief
Unlike standard life insurance policies, which are paid for out of your post-tax income, relevant life premiums are paid by your limited company – and are offset against your company’s Corporation Tax bill.
This can result in tax savings of up to 50%, as the premiums can typically be claimed as a legitimate business expense, providing that they are provided “wholly and exclusively for the purposes of the business”.
Ordinarily, a standard policy will be funded by you (as an individual) from funds which have been subject to Corporation Tax, income tax/dividend tax and National Insurance Contributions.
No benefit in kind
You do not need to declare the insurance policy premiums on your annual P11D form, as they are not deemed to be a ‘benefit in kind’.
Who can benefit?
Employees of many small businesses, including directors, can be covered by a RLP – such as limited companies. However, some business types are not eligible, such as sole traders (see restrictions below).
No impact on pension lifetime allowance
The benefits provided by such policies are not counted towards your pension lifetime allowance, which is currently £1,030,000 (since April 2018).
No Inheritance Tax implications
In the majority of cases, Inheritance Tax is not payable on any sums paid out by the insurer, as the cover is written in trust.
Salary plus dividends can be used to work out cover
You can use the combined value of your salary and dividend draw-downs to work out the maximum amount you can insure your life for. In most cases, this will be 15 to 30 times your annual income.
Understandably, the maximum multiples of income available reduce with age. So, a 30-year-old contractor may be able to secure cover of 30 times income, whereas a 60-year-old may have to settle for 15 times.
Your policy should be portable
Should you decide to take out cover, but then move back to a permanent job, your RLP will typically be portable, so your new employer should be able to continue payments.
Some restrictions do apply
For an RLP to meet all regulatory requirements, there are several restrictions you should be aware of.
- The policy must include life insurance but cannot include critical illness or income protection as well.
- A RLP will cover employees up until the age of 75.
- The policy can only be taken out by a UK-based business, on behalf of a UK resident.
- There is no surrender value if your company stops paying its premiums.
- Some business types cannot take out an RLP, such as a sole trader; a sole trader, by definition, doesn’t have an employer to take out the policy.
Find out more about Relevant Life cover
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