A relevant life insurance policy enables employers to provide individual death-in-service benefits for their UK-resident employees who are aged 18-73 when the policy is established. The policy, which is applied for and paid for by the employer, pays out a tax-free lump sum if the insured employee dies — or is diagnosed with a terminal illness — whilst in the service of the employer.
Relevant life plans are however available only where an employer-to-employee relationship exists — i.e. employees of a limited company. For that reason, relevant life insurance is not available to sole traders, a partnership’s equity partners or equity members of a Limited Liability Partnership.
Employees can use a relevant life policy to provide their own individual ‘death in service’ benefits in addition to those offered by their employer’s group life insurance scheme if such a scheme exists. The premiums paid to a relevant life policy and the benefits paid out, are not included in the employee’s annual or lifetime pension allowances. (Relevant life is a term insurance, so the policy has no surrender value.)
Amount of cover
The policy’s sum assured is based on a multiple of the employee’s total remuneration, which includes his or her salary and any dividends and/or bonuses they may be paid. There is no statutory limit on the amount of cover. Depending on the age of the employee, and the insurance provider’s terms and conditions, the multiple could be as much as 15 to 25 times remuneration.
Tax benefits
Employer: Providing His Majesty’s Revenue & Customs agrees that the premiums paid are wholly and exclusively for the purposes of the business, the employer is entitled to corporation tax relief on the payments. Furthermore, there are no National Insurance contributions to pay on the policy payments.
Employee: There are no National Insurance contributions to pay on the policy payments and as the payments are not treated as a benefit in kind, they are not subject to income tax. On the death of the insured person, the tax-free lump sum will not form part of the deceased employee’s estate and will not be subject to inheritance tax.
TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.
Trust
To ensure the proceeds go directly to the employee's family or financial dependants, we will normally recommend that the policy is written in an appropriate trust.
Portability
If the policy is portable, the employee can take it with them should they move to a new employer, although a new trust would need to be set up in that circumstance. The employee can either assume responsibility for making the policy payments or ask their new employer to pay the premiums as part of a benefits package.
