Relevant life insurance is a useful product for small businesses that want to offer death-in-service benefits to their staff, without setting up a fully-fledged group scheme.
It can be a cost-effective alternative to a group life insurance plan, and in this comprehensive guide, you’ll learn the key information you need to know about relevant life insurance and where to turn for the right advice if your business is planning to set up a scheme.
The following topics are covered below…
A relevant life cover policy is a type of insurance plan that a company (usually a small-to-medium-sized business) can set up to provide death-in-service benefits to its staff.
Like a standard life insurance policy, these products pay out a lump sum to the insured person’s beneficiaries, if they were to die during the term of the plan.
How does it work?
The insurer calculates a premium based on the insured person’s health, age and lifestyle and this will be paid by the company, rather than the individual. The amount a policy pays out is usually based on the multiple of the employee’s salary.
If the insured person passes away during the term of the policy, a tax-free lump sum payment will be made to their beneficiaries, which would usually be their immediate family.
Exactly how much that payout is will depend on the type of policy the business took out with the insurance provider. Some plans, known as ‘level’ policies, are for a set amount agreed when the product was purchased while others are linked to inflation. It is also possible to have guaranteed increases written into the terms, to cover larger mortgages or pay rises.
Relevant life insurance policies are not treated as a benefit in kind, so no income tax is payable, nor are they subject to inheritance tax. Adding to their tax-efficiency, companies can also declare the premiums as a business expense to lower their corporation tax bill.
Businesses taking out relevant life insurance plans for their staff would typically have to agree to these rules and regulations…
- Pay regular monthly or annual premiums for the duration of the term
- Provide accurate information about the insured person and their beneficiaries when setting up the policy or making a claim. This may include information about their health, age and lifestyle as well as their role within the business
- Inform the insured employee to notify the insurance provider if there are any changes to their circumstances during the term. This may include health-related conditions or a change to their employment situation at the firm
- Inform the insurance provider about any claims that need to be made within an agreed timeframe, specified in the terms and conditions of the plan
- Policies only provide a lump sum benefit, payable before a certain age (typically 75)
- The policy will have no surrender value
- Terminal illness benefits can be included but they would usually only apply if the insured employee is under the employ of the firm when diagnosed
The above is intended as a snapshot of the typical rules and regulations firms have to agree to when taking out a relevant life insurance plan. Many policies come with additional conditions that could limit the circumstances under which they pay out, so always check the fine print or make an enquiry to speak with an expert if you’re unsure about anything.
Who can have relevant life cover?
You can apply for relevant life cover on behalf of one or more of your employees if you are…
- A sole trader
- A partnership
- A limited liability partnership
- A limited company
- A charity organisation
The following generally cannot be covered by a relevant life insurance policy…
- Sole traders
- Equity partners in a partnership
- A member of a limited liability partnership
All of the above would not be classed as employees and therefore wouldn’t meet the criteria used by most UK relevant life insurance providers.
In addition, employees can only be insured if they work for the business in a PAYE capacity and are a UK resident.
Is there a maximum age?
Yes. Most relevant life cover policies state that cover cannot exceed the 75th birthday of the insured employee. If you’re a business looking to provide protection or benefits for somebody over that age, make an enquiry as there may be alternatives to consider.
The independent financial advisors we work with have whole-of-market access, can lay out all of the options for you and help you choose the right protection product for your needs.
Providing a death-in-service benefit such as relevant life insurance could potentially help a company attract and retain higher-quality workers and perhaps even boost workplace morale, but there are plenty of other advantages for small-to-medium-sized firms…
- Tax efficient: A relevant life insurance plan can be treated as a business expense, reducing the company’s corporation tax bill. It’s also tax-efficient for beneficiaries, who will pay no income or inheritance tax on their lump sum
- Cost-effective: It often works out less expensive than group life insurance and can potentially pay out more to beneficiaries
- A viable alternative for smaller operations: For small businesses that can afford group cover premiums, there’s no guarantee that they will qualify for one of these products due to their size. Relevant life insurance is available to companies of all sizes, making it a viable alternative for smaller operations to consider
- Company directors can benefit: They can cover themselves using their business’s proceeds, rather than their own personal income
The above is intended as a snapshot of the benefits relevant life insurance can bring. For a bespoke list of the advantages, tailored to your company and staff, make an enquiry and we’ll match you with a financial advisor who can offer bespoke guidance.
Most relevant life plans come with the following cover limits…
- Life cover only: Critical illness cover and disability protection would usually need to be taken out as separate products
- Age limits: Most providers won’t cover employees over 75
- No surrender value: Most relevant life plans have no surrender value
- Benefits must be payable to an individual or charity: Trusts are also acceptable as this helps providers ensure the policy is not being set up for tax-avoidance purposes
This is a subjective question, as the best relevant life cover provider for one business might be unsuitable for another. That said, the market leaders in this sector include Aviva, Legal & General, Vitality, Scottish Widows and Royal London. Each of these insurers will calculate your premiums differently, assessing the level of risk involved in the agreement by looking into the age, health and lifestyle of the employee(s) you’re seeking cover for.
Some cover providers might, for example, charge higher premiums if the employee recently started smoking, while others might be less concerned about this. Policy costs can vary dramatically, which is why it’s advisable to speak to an expert before applying.
The financial advisors we work with are fully independent and can provide you with a free, no-obligation consultation, during which they will familiarise themselves with your firm’s needs and circumstances and draw up a bespoke list of the best deals available.
In this section, we answer the questions we hear most from business customers who are hoping to buy relevant life insurance for their employees…
What is decreasing term cover?
If a relevant life cover policy has a decreasing term, this means that the lump sum amount the beneficiaries receive will go down steadily across the duration of the term. This type of cover might be viable if the insured person has a decreasing debt to pay, such as a mortgage.
Can my firm take out joint cover?
If your firm trades as a partnership, all of the partners would jointly apply for cover for the employee in question, but ‘joint’ policies in the traditional sense do not exist.
Can I offer it to my staff as a salary sacrifice?
Yes. You could offer relevant life cover to your company’s employees as a salary sacrifice benefit – i.e. they must give up a percentage of their income in exchange for the benefit. However, this will mean that you cannot declare the policy as a business expense and will therefore not get all the tax benefits your business might otherwise receive.
How much will a policy pay out?
This will depend on several factors, namely the age of the beneficiary and whether the policy in question is a level or a decreasing plan. As a general rule of thumb, the sum assured can be anywhere between 15 and 30 times the insured person’s salary. This is significantly more than group life insurance, which is typically around 4x salary.
What is the maximum term I can get?
Most relevant life cover providers have a maximum term length of between 40 and 50 years and will end the policy when the insured person turns 75.
Will the lump sum payment count towards lifetime allowance?
No. And for this reason, relevant life insurance plans are popular among high earners who do not want their death-in-service benefits to form part of their lifetime pension allowance.
With so many policies to choose from and so many providers offering them, selecting a relevant life insurance plan for your business is rarely straightforward, but help is at hand.
The independent financial advisors we work with have access to all the insurance providers in the UK and can help you choose the right plan for your firm, based on your needs, circumstances and budget.
Call 0808 189 0463 or make an enquiry and we’ll introduce you to a relevant life insurance expert for a free, no-obligation chat today.