Relevant Life Cover For Directors

By Alex Ogden
Relevant life cover for directors

Relevant Life Cover for Directors: A Closer Look

Understanding Relevant Life Cover

When it comes to safeguarding the future, Relevant Life Cover for directors stands out as a significant option, particularly for company directors. Relevant Life Cover is a type of life insurance policy taken out by a company on the life of an employee or director, designed to pay out a lump sum benefit if the person covered dies or is diagnosed with a terminal illness. This cover is distinct from personal life insurance as it is intended to be a tax-efficient benefit for both the employer and the employee, making it a popular choice among company directors.

Benefits of Relevant Life Insurance

One of the main advantages of opting for relevant life insurance is its nature as a tax-deductible business expense. Unlike personal life insurance, relevant life policies offer tax benefits, such as not being subject to corporation tax, income tax, inheritance tax, or national insurance contributions on the premiums paid. This makes relevant life insurance a tax-efficient way to provide life cover. Furthermore, the benefits paid out are typically free from income tax and inheritance tax, with the added benefit of the business claiming corporation tax, provided they are paid through a relevant life trust.

Key Features of Relevant Life cover for directors

Relevant life policies are distinct in their structure and offer several unique features. Typically, they do not have a surrender value and are not considered a benefit in kind. This means they do not increase the tax liability of the person covered. The cover is usually up to a maximum amount, determined by factors such as the employee’s age and life expectancy. A relevant life policy is often seen as an allowable business expense, providing corporation tax relief to the employer.

Tax Implications and Benefits

The tax benefits associated with relevant life cover are substantial. Premiums paid by the employer are usually treated as a business expense and are therefore tax deductible. This can lead to significant savings, especially for limited company directors. Additionally, relevant life cover does not count towards the lifetime allowance, unlike personal pension schemes, making it beneficial for individuals with substantial pension pots or those seeking to optimize their pension lifetime allowance.

Relevant Life Cover and Directors

Tailoring to Company Directors’ Needs

Company directors of limited companies find relevant life cover particularly appealing. As relevant life plans are not classed as a benefit in kind, they do not lead to an increase in national insurance contributions or income tax for the person covered. For directors of limited companies, this means the opportunity for tax savings while securing substantial life cover. It’s a tax-efficient way to provide death-in-service benefits, commonly associated with larger group life schemes.

Considerations for Directors

Directors need to consider how much coverage they require, the terms of the relevant life plan, and the tax implications for their specific circumstances. Limited company directors, sole traders, and those in a limited liability partnership must understand the nuances of relevant life insurance policies and how they fit into their overall tax planning strategy, with the latter of the two not being able to use relevant life at all. Additionally, understanding the relationship between relevant life cover and potential corporation tax, national insurance implications, and inheritance tax is crucial for making an informed decision.

Maximising Relevant Life Cover Benefits

Integrating into a Comprehensive Strategy

Directors can integrate relevant life cover into their broader financial strategy by considering it alongside other forms of personal cover and business insurance. It’s not just about the immediate tax savings but understanding how it contributes to long-term financial security and planning. By positioning relevant life insurance as a legitimate business expense, directors can ensure that they maximise their remuneration packages’ tax efficiency.

Group Life Scheme vs. Relevant Life Cover

While group life schemes are common in larger organisations, offering death-in-service benefits to all employees might not be as tax-efficient or flexible for smaller companies or those with too few employees. This is where relevant life cover comes into its own, offering similar benefits but tailored to the needs of small businesses or company directors. It’s an ideal solution for limited companies that want to provide their directors and employees with valuable benefits.

Setting Up Relevant Life Cover

Choosing the Right Policy

When setting up a relevant life policy, it’s important to consider the level of cover needed, the term of the policy, and who will be covered. Directors should work with a financial advisor to understand the options available and how a relevant life plan fits into their financial picture. Establishing the policy in a discretionary trust is also a key step to ensure that the cash sum is paid efficiently and in line with the director’s wishes.

Addressing Common Concerns

One of the challenges in setting up relevant life cover can be understanding the implications for UK income tax and ensuring that the policy is set up correctly to avoid unexpected tax liabilities. Ensuring the policy is a legitimate business expense and understanding the terms and conditions can help alleviate these concerns. Directors should also be mindful of the terms related to terminal illness benefits and how these might impact the policy payout.

Parting Thoughts on Relevant Life Cover

Relevant life cover offers a tax-efficient, flexible option for company directors seeking to provide life cover for themselves and their employees. By understanding the key features, tax implications, and strategic value of relevant life insurance, directors can make informed decisions that benefit both their financial planning and their business’s fiscal health. As always, seeking advice from a financial advisor is crucial to navigating the complexities of relevant life policies and ensuring they are a beneficial component of your financial strategy.

Frequently Asked Questions

Can a director claim life insurance?

A director can claim life insurance through a personal policy, but relevant life cover offers a more tax-efficient way for a company to provide life insurance specifically for directors and employees.

Who is eligible for a relevant life plan?

Employees and directors of a company are eligible for a relevant life plan, provided the company pays the premiums and the policy is set up under a discretionary trust.

Who owns a relevant life policy?

The company or employer owns the relevant life policy, and it is taken out on the life of an employee or director.

Is relevant life cover a business expense?

Yes, relevant life cover is considered a legitimate business expense and is tax deductible for the employer, making it a cost-effective option for providing life insurance.

Which UK based insures offer cover?

L&G, LV, Aviva and several other insurers offer relevant life. It is quite specialist so its always best to use our team too find the best value policies for you.