Relevant life cover

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What is Relevant Live Cover?

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.

This is where Cleerly can help. Please feel free to call us on 02394 212912 or request a callback and let us find the right life cover solution for you.

Why is Relevant Life Insurance important?

Securing peace of mind now and in the future

For contractors and self-employed professionals, life insurance is vital as it can replace employee benefits like Death in Service cover, which might be lost when you establish your own limited company. It also helps manage any outstanding business debts, ensuring that the financial responsibility doesn’t fall on your family or business partners if the unexpected occurs.

Cleerly's experts are here to help please call us on 02394 212912 or request a callback for an obligation-free discussion on choosing the right life cover solution for you.

Who might consider a Relevant Life plan?

  • Small and medium-sized enterprises (SMEs) seeking tax-efficient life insurance for directors and employees can benefit greatly from tailored solutions;
  • For small businesses unable to implement a group life scheme due to insufficient eligible employees, offering a death-in-service benefit can be an excellent strategy to attract and retain top talent;
  • Individuals with high earnings and substantial pension funds may prefer their death-in-service benefits to remain outside their lifetime allowance, ensuring financial efficiency;
  • Those participating in a group death-in-service scheme who desire a fixed sum rather than coverage linked to salary at the time of death can find suitable options to meet their needs.

Understanding Relevant Life Insurance

Relevant Life Insurance closely resembles personal life insurance in its core purpose, providing a cash lump sum to your beneficiaries if you pass away during the policy term.

The key distinction lies in the payment structure: personal life insurance premiums are paid from your personal funds, while Relevant Life Insurance is financed by your company and recognised by HMRC as a legitimate business expense. This classification means the premiums are exempt from National Insurance and Income Tax.

Coverage Details

When you opt for Relevant Life Insurance as a Director, the policy includes coverage for:

  • Death: A full payout is provided if you pass away during the policy term;
  • Terminal Illness: Many providers offer an early payout if you are diagnosed with a terminal illness, defined as an incurable condition with a life expectancy of 12 months or less.

It's important to note that Critical Illness Insurance cannot be added to a Relevant Life Insurance policy. For Critical Illness coverage, you may consider a personal insurance policy or Director’s Income Protection.

Types of Coverage Available

Relevant Life Insurance typically offers ‘Level’ Life Insurance, ensuring that the payout remains constant throughout the policy term. Personal Life Insurance, on the other hand, offers a broader range of options, including:

  • Decreasing Life Insurance
  • Increasing Life Insurance
  • Family Income Benefit
  • Whole of Life Insurance

However, personal policies do not provide the same tax advantages as Relevant Life Insurance and require payment from your personal finances.

Simon James, Associate Director - Mortgages & Protection


Expert Commentary

"As a director, you have the flexibility to secure a Relevant Life Insurance policy through your business while also maintaining personal coverage. This dual approach allows you to hold multiple policies and benefit from considerable tax relief savings."

Eligibility for Relevant Life Cover

Relevant Life Insurance is designed for individuals working through their own business, but the eligibility for Relevant Life policies extends beyond contractors alone. Suitable candidates include:

  • Directors of a Limited Company;
  • Management consultants;
  • High-earning employees of small enterprises;
  • Employees of small businesses in general.

A crucial requirement for Relevant Life Insurance is a company structure to administer and finance the policy. Consequently, self-employed sole traders or equity partners (shareholders) are ineligible.

These policies are particularly advantageous for contractors without access to Group Life Insurance, which typically requires a minimum of three participants. Therefore, if your business has a limited number of employees or the director is the sole staff member, Relevant Life Insurance is an excellent option.

Coverage Amount for Contractors and Company Directors

The available coverage amount is influenced by various factors such as age, earnings, and budget. Insurers may limit coverage to a multiple of your earnings, with potential upper limits reaching 25 to 30 times your total remuneration, which includes:

  • Salary
  • Bonuses
  • Dividends
  • Commissions
  • Overtime pay

For instance, with a total annual remuneration of £100,000, you could apply for up to £3,000,000 in coverage. However, it's often unnecessary to secure the maximum, so consider a budget-friendly policy for your company.

Determining Coverage Needs

Prior to applying, it's essential to ascertain the necessary amount of coverage. The lump sum benefit is designated for your chosen beneficiaries, so consider potential uses such as:

  • Paying off a mortgage
  • Settling outstanding debts
  • Covering funeral expenses
  • Providing an inheritance

Be aware that a higher benefit incurs greater costs, whereas selecting only the required coverage results in more affordable premiums.

Feeling inspired?

Want to protect your loved ones but aren't categorised as permanently employed?

Whether you’re looking to get the ball rolling on an application or you’re just after some friendly advice, don’t hesitate to give us a call on 02394 212912 or complete the form below.

Understanding HMRC's Treatment of Relevant Life Insurance for Contractors

Relevant Life Insurance is renowned for its tax efficiency, offering considerable savings compared to personal life insurance since the premiums are covered by your limited company.

Your tax obligations will depend on various factors, including your personal situation. Therefore, it is advisable for contractors to consult with an accountant regarding the specific tax implications for their business.

Generally, Relevant Life Insurance is:

  • Financed by the limited company and recognised by HMRC as an allowable business expense;
  • Excluded from both employee and employer National Insurance calculations;
  • Not considered a taxable benefit in kind;
  • Structured to provide a tax-free payout that does not count towards your lifetime pension allowance*, unlike many group schemes.

It is crucial to ensure that the primary purpose of your policy is not perceived as tax evasion, which is a matter to discuss with your accountant. In most cases, Relevant Life Insurance is fully compliant with HMRC regulations.

As specialist mortgage and protection consultants, with more than 20 years' experience in serving contractors and independent professionals, Cleerly are well versed in providing our clients with appropriate advice tailored to clients' unique circumstances. Call us on 02394 212912 or request a callback for an obligation-free discussion on choosing the right life cover solution for you.

*Please note, the Lifetime Allowance status is subject to legislative change; please consult the Cleerly team or an Independent Financial Adviser. The content of this page is correct at time of publishing, September 2024.

Relevant Life Insurance FAQs

Keyman Insurance is designed to benefit the business, ensuring its continuity. In contrast, Relevant Life Insurance must be structured to benefit individuals or charities to maintain its tax-efficient status.

Relevant Life Insurance premiums are funded by your limited company, providing substantial tax savings and carrying HMRC approval.

These premiums qualify for both National Insurance and corporation tax relief. Additionally, through a specially designed trust, any payout remains tax-free if you pass away during the policy term.

When considering Relevant Life Cover, it's important to be mindful of several restrictions:

  • HMRC has not approved the tax status of Relevant Life Insurance when combined with Critical Illness Cover, meaning tax benefits apply solely to life assurance;
  • This cover is unsuitable for sole traders or equity partners (shareholders);
  • The policy’s primary intent should not be tax avoidance, such as evading income tax or inheritance tax;
  • Coverage is limited to employees up to the age of 75, with payouts occurring only if the employee passes away before this age;
  • The policy must not have a surrender value; it should be a term insurance policy only;
  • Beneficiaries are restricted to individuals or charities.

For additional types of coverage, such as Critical Illness cover, personal insurance might be necessary.

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