All you need to know about: relevant life cover

Who might benefit from a relevant life policy?

Relevant life is a tax-efficient way of providing life cover to company directors and employees who work for businesses that are too small to set up a group death in service scheme. Relevant life can also be useful for higher earners who want more cover than their death in service benefits provide or those who have large pension funds. Relevant life cover offers tax benefits to both employers and employees. The company pays the premiums, which are usually deemed an allowable business expense by HMRC and therefore exempt from corporation tax. The premiums are not treated as a benefit in kind to the employee. The premiums and any lump sum benefit paid are eligible for relief from income tax and National Insurance contributions, too.

You said relevant life cover can benefit those with large pension entitlements – why so?

Where a death in service policy is written under pensions legislation, as is usually the case, lump sums paid out upon death count towards the pension lifetime allowance. Benefits paid under a relevant life policy do not. A high earner with a salary of £125,000 and death in service benefits of four times salary could ultimately use almost half of their lifetime allowance (currently £1,073,100 per individual). Even if the benefit is split between several beneficiaries, the total death benefit still needs to be checked against the lifetime allowance. Without prudent planning, beneficiaries may find themselves liable to a 55% tax charge on lump sums and 25% on income. In most cases, relevant life policies are written in trust. Any benefits fall into the trust and out of the estate for inheritance tax purposes.

Who can take out a relevant life policy?

Most commonly relevant life cover is taken out on behalf of company directors but any employee of a sole trader, partnership, limited liability partnership, limited company or charity qualifies. These are single life policies covering one relevant life. Our relevant life cover is available to those aged between 16 and 73 when the policy is taken out. The policy term cannot exceed age 74. Premiums can be paid monthly or annually and are guaranteed unless the level of cover is changed. The policies are generally level term or indexed in line with inflation but can also be taken out on a decreasing term basis.

How much relevant life cover can my client have?

Many company directors pay themselves a low salary and higher dividends. The maximum amount of relevant life cover, as stipulated by HMRC, is a multiple of total remuneration – salary, dividends, bonuses and benefits in kind. This is 30 times total remuneration for those aged 16 to 39 at the inception of the policy, 20 times for 40-49-year-olds and 15 times for those aged 50-plus.

What happens if a client changes employer?

Our relevant life cover is fully portable – from employer to employer or employer to employee provided there is no break in the premiums. When porting between employers the policy remains relevant life cover, but when porting to an employee the policy switches into the employee’s name and the policy becomes a personal protection plan. At that stage, the relevant life trust is retired and a discretionary trust can be established instead. Terminal illness cover, whereby a claim can be made if the life assured is diagnosed with a terminal illness and has a life expectancy of 12 months or less, would also cease to exist.

Why should advisers consider advising on relevant life cover?

Most advisers have business owners or company directors who can protect their families through this type of protection. Relevant life isn’t business protection but it’s a great door opener to get into business protection. Key person and shareholder protection is a lucrative yet untapped market.

Where can I learn more about relevant life cover?

We regularly run webinars with advisers – for individuals, firms and networks – to increase their knowledge and confidence in this area. You can find out more about Zurich’s relevant life cover and calculate potential tax savings with our relevant life calculator at zurichintermediary.co.uk/relevant-life or contact your business account manager for information and support.

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