Relevant life plans: is your business missing out?

Most people pay for life insurance on an individual basis. But, if you’re a company director, an alternative option exists that could potentially save you thousands of pounds in insurance premiums.

If you’ve got a mortgage, then more likely than not, you’ve got life insurance. Even if you’re not a homeowner, anyone with a spouse, a long-term partner or dependents of any kind should consider getting life insurance as a first port of call in the financial planning process.

Neglecting this element of your financial planning can undo the best-laid plans – as without an immediate financial safety net in the event of your death, your loved ones might not see the full benefits of the assets you leave behind.

However, getting covered is not the end of the story. If you’re a company director, and you’re unfamiliar with a “relevant life plan”, there’s a strong chance you’re paying a lot more than you need to for life cover.

What is a relevant life plan?

A relevant life plan allows businesses to provide tax-efficient ‘death in service’ benefits to employees (including directors). It’s a ‘term’ policy, which means you’ll have it for a fixed length of time, and so long as the business keeps up with the premiums, the plan will pay out to your dependents in the event of your death.

The benefit of a relevant life plan lies in its cost. Company directors who pay for cover on an individual basis are paying out of earnings that have already gone through several layers of taxation. For example, a £50 monthly premium will cost considerably more in real terms – as that’s £50 net of income tax, employee national insurance contributions, employer national insurance contributions and corporation tax.

Relevant life plans on the other hand are paid out of pre-tax profits, as they’re classed as an allowable business expense. They’re also not classed as a P11D benefit, also known as a “benefit in kind”, so they aren’t taxed as such. This can lead to substantial savings for business owners – savings that can add up to thousands of pounds over the term of the policy.

Who benefits from a relevant life plan?

Certified financial planner Nathan Trowbridge specialises in advising company directors on their personal pensions and investments. He finds that smaller companies – particularly family businesses – may benefit hugely from relevant life policies.

Nathan said, “Quite often when you’ve got a husband and wife running a company, one of them will be the linchpin of that business. It might be that the wife is the talented one while the husband’s in the background or vice versa – but in my experience, it’s rare that’s it’s both 50-50.

So, in these situations, we dig deeper and say, okay, if one of you unexpectedly passes away, is the other one able to carry on running the business? And on reflection, they realise… maybe not. Or maybe they’d technically be up to the job, but carrying on the same as before might be too emotionally difficult. These are the things you’ve got to consider.

If we put a relevant life policy in place, then we can ensure that the surviving spouse would have the money to make a choice: either carry on with the business, or wind it up. It’s all about giving people options – and peace of mind.”

Is there a catch?

The only caveat with relevant life is that there’s got to be an employer-employee relationship between the person covered and the businesses setting up the policy. If the director-shareholder is an employee, then subject to underwriting, it’s unlikely to be a problem with their eligibility for the plan.

The definition of ‘employee’ can vary between providers, but a general rule is that an employee will be taking some sort of income on the payroll. Dividends can be taken into account for calculating the sum assured, but if you’re not taking a salary, you risk not being considered an employee.

Should all business owners consider relevant life cover?

The suitability of this sort of business protection will depend on your unique situation. Some businesses will have different needs that make another sort of cover more appropriate. For example, relevant life plans can’t be used as shareholder protection, as they’re essentially personal life cover for the benefit of financial dependents.

Nathan Trowbridge said, “It’s very, very cost -effective for the company. You can set it up for all your employees, and it’s just a nice addition to an employee benefits package. For the right type of client, it’s a no-brainer.”

The most suitable course of action is dependent upon individual circumstances. You should always seek professional financial advice. Taxation is subject to change.

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