Relevant life insurance is effectively a life insurance policy that pays out a tax-free lump sum in the event of death during the policy term. Proceeds are paid to nominated beneficiaries not the company that pays for the scheme.
The premium is usually treated as an allowable business expense and is also NOT a P11D benefit. So your company pays less Corporation Tax and National Insurance, thereby freeing up a little money which would ordinarily be spent on essential personal costs.
Although classed as a company expense, if you decide to close your company down or leave, you have the option to take your policy with you. It will be converted to a standard term assurance plan at no cost.
As a matter of course your relevant life policy will be written into trust*. Roxburgh would do this for you. This ensures:
- The policy is paid outside of your estate so Inheritance Tax is unlikely to be an issue
- That your policy qualifies as a relevant life scheme.
- The payment to the beneficiaries is swift as it can avoid a lengthy probate process
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
* Trusts are not regulated by the Financial Conduct Authority
Typically, there is no Inheritance Tax on benefit when placed in trust and the premiums and amount insured won’t count towards your pensions lifetime allowance.
Below is a worked example of a £50-per-month policy comparison for a higher rate tax payer being taxed at the highest rate of 45% where Corporation Tax is 19%.
The above is for illustration purposes only and is based on 20118/2019 tax year contributions.
Only you or your family will know the true value of a policy when you make a claim. Roxburgh advisers are here to deliver clear, concise advice so that, in the unfortunate event of a claim, your policy delivers as expected.
Roxburgh Financial Management was set up to provide specialist help to people unsure how to go about choosing from the many protection products available. For example, some providers allow continuation of cover that is easy for the life assured to transfer. This helps if there are multiple controlling shareholders.
Our specialists will help you to navigate all the options to find the cover that is right for you and your family at an affordable rate.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
Five reasons to use us
1. We offer insurance advice with no obligation
2. We will explain the good, the bad, and the ugly
3. We will ask the right questions
4. We do all the work, right through to helping complete the application form
5. We can access a comprehensive range of insurance providers
Types of relevant life insurance
There are several types of insurance available dependent on your individual circumstances. Listed below are the different types of relevant life insurance.
Level Term life insurance
Level Term life insurance is the most straightforward type of plan available. The plan holder pays a premium, usually each month to the insurance provider to ensure that an ‘agreed amount’ (the benefit) is paid out should the person insured die within the agreed number of years (the term). Level Term life insurance is commonly used to pay off an interest-only mortgage (as the debt remains the same over the life of the mortgage) or provide simple family protection.
Decreasing Term life insurance
Decreasing Term life insurance starts off at an ‘agreed amount’ (benefit) and then reduces over the length of the term. The plan holder pays a premium, usually each month, to the insurance provider to ensure that the ‘decreasing amount’ (the benefit) is paid out should the person insured die within the agreed number of years (the term). The amount you pay (the premium) is fixed throughout the term of the policy. The premium level is lower than that of Level Term insurance due to the benefit amount decreasing.
Decreasing Term insurance is commonly used to pay off a repayment mortgage, with the term of the plan matching the outstanding term of the mortgage. The plan is designed to repay the outstanding mortgage balance subject to: all mortgage payments being made, no alterations to the term throughout the plan and that the interest rate does not exceed a specified level.
Increasing Term life insurance
With Increasing Term life insurance, a sum assured (benefit) is chosen which increases over time. An insurer is paid a monthly premium by the policy holder throughout the term to ensure that the ‘increasing amount’ is paid out should the plan holder die within the policy term. The sum assured will increase each year at an agreed rate, usually that of the Retail Price Index (RPI) or the Consumer Price Index (CPI). This is called “indexation”. As your benefit increases, so does your premium. Indexation is chosen to ensure the purchasing power of your selected benefit is ‘future-proofed’; as it will increase as the cost of living goes up i.e. with inflation.
Relevant life insurance options
As with all things, the more options you choose the higher the price. Life insurance is no different and different insurers load the options differently. It is therefore important to determine what you need and what you would like so we can find the best relevant life protection policy available to you in the market place. Below are some of those options.
Guaranteed or reviewable
With guaranteed premium policies, the basic premium you pay stays the same throughout the policy term unless you increase the required income amount (or if you have indexation).
A plan with reviewable premiums is reviewed by the provider each year (like home insurance) and a new set of terms are then issued for the next 12 months. There may be no change. But, the provider can change the premium.
Level or indexed
‘Level’ means that the amount you receive will remain the same throughout the time you have the insurance, regardless of whether your income or expenditure increases. Alternatively, the amount you receive can increase each year in line with inflation, using either the Retail Price Index (RPI) or the Consumer Price Index (CPI).
Waiver of premium
If ‘waiver of premium’ is selected then, when you begin receiving an income from the insurance policy, the premiums paid will be refunded back to you until the claim finishes.
Most ASU plans do not offer a waiver of premium option, meaning you must pay for the plan whether in claim or not.
If a renewable term is chosen then cover can be extended at the end of the original term for a set period of time, in some instances without the insured having to provide additional medical information.
Some specified pre-existing medical conditions may be covered by some insurance providers but others may not. There are also exclusions specified by each individual provider; for example alcohol or drug abuse may void the policy and result in non-payment of a claim.
If cover is provided on non-standard terms or even on smoker rates, and you change your lifestyle during the term in a way that you think should reduce the likelihood of a claim, for example you have stopped smoking, some providers will allow the cover to be reviewed mid-term.
A convertible plan allows the plan to be converted to a whole-of-life policy without having to provide any further medical information. Premiums for this type of policy are higher at the outset than for standard life insurance policies. Once the policy converts to a whole-of-life plan the premiums are also likely to increase.
Cover Increase option
There is often an option to change cover without further medical information if your circumstances change often due to a significant life event. Providers options vary but some examples are: marriage, divorce, increased mortgage amount, birth or adoption of a child, and salary increase.
Accidental Death Benefit
Accidental Death Benefit will pay out if you die as a result of an accident while your application is being underwritten.
A relevant life plan is written into trust to avoid the proceeds of the plan contributing to the value of your estate. This can mean that any pay-out won’t be liable for Inheritance Tax (IHT). Putting your policy into trust not only means any pay-out is ring-fenced from your estate for Inheritance Tax purposes, it also means they can get the money much quicker as they can bypass probate.
Under current legislation the Inheritance Tax threshold is £325,000 for a single person or £650,000 for married couples and registered civil partners. IHT is charged at 40% on anything you leave over these amounts when you die. With the average house price in the UK currently £216,750, potentially millions of homeowners risk leaving a tax bill.
When a discretionary trust is set up, the insured person can name all of the people who may want to benefit from the plan proceeds in the future. Trustees are also named. The trustees are the people who will be the legal owners of the trust fund and responsible for managing the proceeds of the plan and distributing them amongst the beneficiaries.
Terminal illness benefit will mean the life insurance benefit will be paid out early if you are diagnosed with less than 12 months to live. Some providers will exclude this benefit in the last 12 or 18 months of the plan term whereas there are providers who will keep this benefit throughout the entire policy term.