Safeguard Your Family's Future, Tax-Efficiently, with Relevant Life Insurance

What is Relevant Life Insurance Cover?

Picture a solution that secures your family’s financial future and also helps you reduce taxes and offers a valuable employee perk—without triggering any Benefit-in-Kind (BiK) tax charges. That’s the unique advantage of Relevant Life Insurance, a tailored option designed for employees, directors, self-employed, contractors and high earners.

Relevant Life Insurance functions much like personal Life Insurance, providing a lump sum payment if you pass away or receive a terminal illness diagnosis with a prognosis of 12 months or less. For contractors and the self-employed, this type of ‘relevant life policy’ is secured by the limited company and provides life cover to an employee (and directors). Key aspects of this protection include:

  • The benefit amount is given to your loved ones, offering financial support during a challenging period;
  • Some providers allow coverage of up to 25 times your salary;
  • These policies are taken out and paid for by the employer (for example a Limited Company), for the benefit of the employee and their family;
  • Upon death, the payout is placed in a special trust established at the start of the policy, which helps avoid inheritance tax implications on the benefit.

In this article, we’ll explore what makes relevant life insurance such a practical option, including its tax benefits and coverage details. If you’re a limited company contractor or business owner searching for a way to protect your family and optimise expenses, this could be exactly what you’ve been looking for.

Why consider a Relevant Life Insurance Policy?

For contractors and self-employed professionals, life insurance plays a crucial role in filling the gap left by employee benefits like Death in Service cover, which is often unavailable when transitioning to running your own limited company. Additionally, it provides a safeguard against any outstanding business debts, ensuring that the financial burden doesn’t fall on your family or business partners in the event of the unexpected.

Who Should Consider a Relevant Life Plan?

Relevant Life Plans can be an excellent choice for a variety of individuals and businesses seeking tailored and efficient life insurance options:

 

SMEs Looking for Tax-Efficient Solutions

Small and medium-sized enterprises aiming to provide life insurance for directors and employees can benefit from the tax advantages and customizable nature of Relevant Life Plans.

 

Small Businesses Unable to Offer Group Life Schemes

For organisations with too few eligible employees to establish a group life insurance scheme, offering a death-in-service benefit through a Relevant Life Plan can be an effective way to attract and retain talented team members.

 

High Earners with Significant Pension Contributions

Individuals with substantial pension funds may favor keeping death-in-service benefits outside their lifetime allowance to avoid additional tax implications, making a Relevant Life Plan an ideal option.

 

Participants in Group Death-in-Service Schemes Seeking Flexibility

Those currently covered by group schemes but preferring a fixed sum insured rather than benefits tied to salary at the time of death may find that a Relevant Life Plan better aligns with their preferences and long-term goals.

This versatile insurance solution provides tailored coverage to meet different needs, making it a valuable option for many.

Who Is Eligible for Relevant Life Insurance?

Relevant life insurance is designed to cover employees, directors, and high earners. However, it is not available to sole traders or equity partners/members. To qualify, the individual must be employed by a limited company, partnership, charity, or another eligible business structure.

It's important to note that relevant life insurance focuses solely on life cover and does not extend to disability or critical illness protection. Policies typically remain in effect until the insured employee reaches the age of 75, offering long-term security within these parameters.

The Tax Benefits of Relevant Life Policies

Relevant life policies offer a range of valuable tax advantages, allowing employers to provide a cost-effective, tax-efficient benefit to their workforce. These benefits include corporation tax relief on premiums, exemption from Benefit in Kind taxation, and potential savings on inheritance tax. Here's a closer look at how these advantages work and why they matter.

 

Corporation Tax Relief

One of the key benefits for businesses is that premiums paid towards relevant life policies qualify as an allowable business expense. This means companies can claim 100% corporation tax relief on these payments. By reducing the overall corporation tax liability, this makes relevant life insurance an appealing and financially savvy choice, particularly for limited company contractors or small business owners.

 

Benefit in Kind Exemption

Relevant life policies also stand out because they are exempt from Benefit in Kind taxation. Here’s what this means for employers and employees:

  • Employers can fully deduct premiums as a business expense without them being classified as a taxable benefit.
  • Employees do not pay any PAYE tax or national insurance contributions related to these premiums, as they aren’t treated as a taxable perk.

This Benefit in Kind exemption ensures the policies remain advantageous for both parties—offering employees additional security without increasing taxable income, while keeping costs low for employers.

 

Estate and Inheritance Tax Savings

Relevant life policies are also a powerful tool for estate planning. When written into a trust, the payout from the policy does not form part of the insured person's estate. This has significant tax-saving benefits:

  • The payout can be directed to beneficiaries free of inheritance tax.
  • Families can use the tax-free payout to settle inheritance tax bills, reducing financial strain.

With the current inheritance tax rate in the UK at 40% for the portion of an estate exceeding the £325,000 threshold, this type of planning can provide much-needed reassurance and protection for loved ones.

By combining these tax-saving features with comprehensive life insurance coverage, relevant life policies offer a win-win for businesses and their employees, positioning them as a smart and efficient choice for financial security.

HMRC's Approach to Relevant Life Insurance for Contractors

Relevant Life Insurance is widely recognised for its tax efficiency, providing significant savings when compared to personal life insurance, as the premiums are paid by your limited company.

Your specific tax obligations may vary, depending on your personal and business circumstances. For this reason, contractors are strongly encouraged to seek guidance from their accountant to fully understand how the tax rules apply to their situation.

Typically, Relevant Life Insurance is structured as follows:

  • Premiums are paid by your limited company and are treated by HMRC as a valid business expense.
  • It is excluded from National Insurance contributions for both employees and employers.
  • Premiums are not treated as a taxable benefit in kind.
  • The policy provides a tax-free payout that does not impact your lifetime pension allowance, unlike some group life insurance schemes.

It’s essential that the primary motive for the policy is not seen as tax avoidance. This is an area to discuss with your accountant to ensure compliance with HMRC regulations. Fortunately, in most cases, Relevant Life Insurance aligns fully with these rules.

Summary

Relevant life insurance offers an affordable and tax-efficient way for employees, directors, and high earners to secure their families’ financial stability, combining protection with significant tax benefits. Unlike traditional life insurance, it stands out with unique features such as employer-paid premiums, eligibility for corporation tax relief, exemption from Benefit in Kind taxation, and inheritance tax advantages. These benefits make it not only a valuable financial safeguard but also an appealing option for businesses aiming to attract and retain top talent.

Understanding who qualifies, the coverage details, and the specific tax implications empowers employers, self-employed business owners and contractors to make well-informed decisions when introducing a relevant life plan. Ensuring your family's financial future is increasingly essential, and relevant life insurance is a useful solution to helping achieve that peace of mind.

With over 20 years of experience supporting contractors and independent professionals, Cleerly's Protection Consultants specialise in offering tailored advice that suits individual needs. To explore the best life cover options, call us on 02394 212 912 for an obligation-free discussion or request a callback .

 

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