Understanding Relevant Life Insurance for Directors
Understanding Relevant Life Insurance for Directors
In our experience directors love relevant life insurance as it’s both tax efficient and still provides essential life insurance for them and their family. It’s also a rare things that a personal benefit can be paid by the business with no benefit in kind tax to pay either. So with no income tax, no benefit in kind, no national insurance and corporation tax relief its easy to see why its so popular.
What is a relevant life insurance for directors?
Relevant life insurance for directors is a life insurance policy that has been approved by HMRC as a tax deductible business expense resulting in some great corporation tax savings that can be made. Although it is paid for by the business the benefit is still paid to the directors family personally and can be essential when there is the loss of a breadwinner in the family. It’s important to note that sole traders cant use the policy as usually sole traders do not have their own limited company. The life insured also needs to be a uk resident.
Key advantages of relevant life insurance for directors
The corporation tax relief is usually the thing thats gets company directors excited as let’s face it, we all want to reduce our corporation tax bill where we can. The second great think about relevant life insurance for directors is it provides essential life insurance for their families which can be crucial should the worst happen. The final benefits are a saving in both additional income tax and national insurance which on average saved company directors 62% every year.
Tax Advantages and key aspects of relevant life policies
Usually a larger company might offer its executive team a death in service benefit. It would be a tax free benefit in kind and no tax would be charged. But what about smaller companies and SME’s who are not big enough to have a death in service benefit. Thats where relevant life insurance for directors come in. There is no income tax to pay on premiums, no national insurance and no benefit in kind either. Its an incredibly tax efficient policy that most company directors love.
Are relevant life insurance for directors a legitimate business expense?
Relevant Life Insurance Policies are a legitimate business expense approved by HMRC that can make significant savings for the company. It still provides personal cover for the directors family but without the tax liability. As well as the life insured saving money on uk income tax the business also can claim corporation tax relief. As long as the relevant life policy is left in trust there would be no tax to pay by the family in the event of the benefit being paid out.
Comparison of other insurance and director-specific life insurance
Group life insurance scheme vs. Relevant life insurance policies
A group life scheme is a great benefit offered by larger companies, however compared to relevant life policies are far less flexible. If you are offer death in service from a group life scheme and leave the company the policy is usually canceled. This could be an issue if you leave a company later in life where finding replacement life cover might be very expensive or even impossible if you have an medical history that could be problematic.
A relevant life plan can be converted into a personal policy if the company were sold or closed down, meaning your life insurance would remain intact. Where previously the company pays the premiums the life insured would now pay them instead.
Personal life insurance vs relevant life insurance policy
Both personal life cover and relevant life cover are in fact the same and offers by the same insurers and the premiums for cover are also identical. So the main difference is a major one and that is that a relevant life plan is an allowable business expense. For a director to pay personal life insurance policy premiums they would need to pay income tax and national insurance contributions on the income. the company would also pay corporation tax as well before the money was paid to them from the company. All of the can be saved when using relevant life with zero loss of benefit over a personal policy.
Replacing a personal policy with relevant life insurance
If you have had your personal policy for a while be careful as the premiums might be very cheap so always get some quotations before going ahead and cancelling your personal life cover. We offer a free service where we make some tax calculations for you to make sure the move to relevant life would be more cost effective. There would be no loss in cover using a relevant life insurance policy over a personal life policy.
All policies above have no surrender value and any policy premiums paid would be lost of the policy where to be canceled.
When was relevant life cover introduced?
Back in 2006 at and event called ‘A Day’ there was a massive shake up to the tax system. One of those changes was the introduction of relevant life cover. It was introduced to offer SME’s tax efficient life insurance that matches the benefit of a death in service benefit. Since then several major insurers such as L&G, Zurich and Aviva have launched relevant life insurance policies and they have been widely accepted by accounts for nearly twenty years now. A relevant life policy is one of the most tax efferent policies a company director can have.
Is relevant life insurance allowable for corporation tax?
Relevant life insurance has been an allowable business expense for nearly 20 years now. HMRC understand that company owners need access to director life insurance cover and are happy to offer corporation tax relief as an incentive. There are other forms of company life insurance that do not have tax relief paid. In fact the only two that are an allowable business expense are relevant life cover and executive income protection.
Relevant life plan and inheritance tax saving
As with a personal policy as long as the relevant life policy is left into trust there would be no inheritance tax to pay on the lump sum benefit. This is common with all types of life insurance and makes a relevant life plan as well as personal policies very inheritance tax efficient. Usually a discretionary trust would be used.
How much cover do you need?
The amount of cover by limited company directors needed will depend on the financial situation of the life insured. If they have a family at home and are the main breadwinner then more cover may be needed. If they have other assets that their family could use such a a property portfolio or investment then less cover might be required. Ideally you need to calculate the cash sum that would be paid tax free to their family. the average for other clients us circa £1 million of cover.
Can you add critical illness to a relevant life plan?
No, critical illness cover cannot be added to relevant life. Terminal illness cover is usually included for free but this varies with each insurer. Terminal illness would pay out if the life assured is deemed to be terminally, which is very different to be critically ill so please keep this in mind as it is often confused.
Can small businesses use relevant life insurance?
Relevant life cover is design specially for small businesses and limited company contractors and can be essential business protection for both business owners and even high earning employees and traditional employees alike. It can form part of an employee’s remuneration package and leave an attractive lump sum to the family of the employee if he person covered dies.
If you are a company director and need life insurance relevant life is without doubt the most tax efficient policy you can take out. If you have personal cover then assess if it would be more cost effective to cancel it and take our a relevant life plan through your business.