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If you run your own business and have personal life insurance in place to financially protect your family, did you know that you could make a substantial tax saving on your premiums by taking out what is called ‘relevant life insurance’?
Company directors paying 40% personal income tax could save up to 52% on their life insurance premiums (up to a 36% saving for those on a 20% tax rate) when compared to having personal life cover in place. This means that someone with a £50 a month personal life policy could save £7,800 over a 25 year term, by taking out relevant life cover instead.
Relevant life insurance is the same in essence as the most common types of life cover sold in the UK – level-term and decreasing-term life cover – in that it pays out a lump-sum benefit if the person covered passes away within a set period. However, the difference with a relevant life insurance policy is that it is paid for by your business, meaning it is eligible for tax savings. Relevant life insurance premiums are tax deductible as a trading expense, and because they are not treated as a P11D benefit there aren’t any implications on the amount of personal tax you pay.
When a relevant life policy is paid through your business there also aren’t any national insurance implications, and the benefit paid out under the policy is not registered with HMRC, and therefore does not form part of your pensions allowance. So you can see that a tax saving in one place doesn’t have a knock-on effect that costs you more elsewhere.
An important part of taking out any form of life cover is having the policy written under a suitable trust, which has added benefits when a claim is made. When setting up relevant life cover, the policy must be written under a specialist ‘relevant life trust’, which an adviser should do free of charge.
The trust behaves in the same way as a discretionary trust for personal life cover. It ensures that any claim is paid promptly to the listed beneficiary without having to wait for probate, and also that the policy benefits remain outside of your estate, and therefore, are not eligible for inheritance tax.
For a relevant life plan to be paid through your business it must only cover the death of the policyholder. Disability or critical illness cover cannot be included. There are also restrictions on the amount of life cover that you can take out, but this is set at up to 15 times your total remuneration, including salary, dividends and P11D benefits, so notably above what most people would insure themselves for.
Most protection insurers in the UK sell relevant life insurance, but the premium and cover you are offered can vary greatly between providers. Factors such as your occupation, general health and the lifestyle that you lead can all have a significant impact on how much an insurer will charge and the terms of the policy.
It usually makes a lot of sense to seek independent specialist advice when considering relevant life insurance. An advisor will be able to recommend the best value cover for your specific circumstances and go through the savings you can make when compared to personal cover.
CORONAVIRUS UPDATE MARCH 2020 – many insurance companies are either withdrawing temporarily from offering cover or increasing rates. A big factor in this decision is their current inability to perform medical checks and/or apply to a GP Practice for copy medical reports. You should speak to your adviser as soon as possible if you would like to consider taking out one of these policies.
We’ve partnered with Seico to offer advice on all types of Life Cover including Relevant Life Cover. You can call them on 0330 335 3399 and they’ll be able to offer individual advice on the best type of cover for you.