What Is a Relevant Life Insurance Policy?
Learn about relevant life insurance, a distinct policy structure offering specific benefits for employers and their workforce.
A Relevant Life Insurance policy is a specialized form of life coverage prevalent in the United Kingdom. It provides a tax-efficient way for employers to offer a death-in-service benefit to their employees. This individual policy offers financial protection to an employee’s beneficiaries in the event of their death or diagnosis with a terminal illness while employed.
Understanding Relevant Life Insurance
Relevant Life Insurance is a life policy established by an employer for an employee’s benefit. Its purpose is to provide a lump sum payout to the employee’s beneficiaries if the employee dies or is diagnosed with a terminal illness during employment. The employer takes out the policy, becoming the policyholder, and pays the premiums associated with the coverage. The employee, whose life is insured, is the individual covered by the policy.
The beneficiaries, typically the employee’s family or financial dependents, receive the payout directly. This ensures the employer-provided benefit supports the employee’s loved ones. Relevant Life Insurance is an individual policy, making it suitable for businesses of varying sizes, including those with a smaller workforce or just a few key employees. It is designed to meet a set of legislative requirements in the UK to qualify for its particular tax treatment.
Key Features and Advantages
The “relevant” aspect of this insurance type stems from its unique tax treatment, which offers significant advantages for both the employer and the employee in the UK. Premiums paid by the employer for a Relevant Life policy are typically considered an allowable business expense for corporation tax purposes, provided they are incurred “wholly and exclusively” for the purpose of the business. This means the business can often deduct the cost of the premiums from its taxable profits, potentially reducing its overall corporation tax liability.
Furthermore, the premiums paid by the employer are generally not treated as a taxable benefit-in-kind for the employee. This implies that the employee does not incur personal income tax or National Insurance Contributions (NICs) on the value of the premiums, leading to a more tax-efficient benefit compared to a personally funded policy. For high-earning employees, a Relevant Life policy payout does not count towards pension lifetime allowances, offering an additional benefit not available with some other forms of life cover linked to pension schemes.
A crucial feature of Relevant Life Insurance is that the policy must be written under a trust from its commencement. This trust structure ensures that the policy proceeds, upon a valid claim, are paid directly to the employee’s beneficiaries outside of their estate. Consequently, the payout is free from UK Inheritance Tax (IHT) for the beneficiaries, and it avoids the probate process, allowing for quicker access to funds. While the policy itself may be subject to periodic or exit charges within the trust, these are often negligible if the funds are promptly distributed.
Setting Up and Managing a Policy
Establishing a Relevant Life Insurance policy involves several practical steps for the employer. The employer, as the policyholder, initiates the application process, typically working with an insurance provider or financial adviser. During this phase, the employee whose life will be insured will need to provide personal information, including health and lifestyle details, to enable the insurer to assess the risk and determine the premium. The policy must be written into a trust at the outset, with the employer, trustees, and beneficiaries clearly defined.
The policy term, which can range from one to 50 years, is agreed upon, and the sum assured is typically set as a multiple of the employee’s annual salary, often between two and four times their wage. The policy will generally end before the employee reaches a specified age, commonly around 75 years. Ongoing management responsibilities for the employer include ensuring timely payment of premiums and updating employee details as necessary.
The policy typically provides a lump sum payment only upon death or terminal illness, meaning it does not usually include other benefits like critical illness cover or a surrender value. If an employee leaves the business, the policy can sometimes be transferred to a new employer, maintaining its relevant life status, or it may be converted to a personal policy, though without the same tax advantages. While designed to be straightforward, employers should be aware of specific conditions, such as the requirement for both the employer and employee to be UK residents.