Protection  

Making life cover relevant

Making life cover relevant

Relevant life policies offer employers a tax-efficient way to provide protection to workers. As well as benefiting employers and their employees, as these plans sit halfway between individual and group business, they can also provide advisers with an opportunity to extend their own operations into the corporate space.

The plans are a relatively recent addition to the protection stable, first becoming an option back in 2006 when the new pension simplification rules were introduced. Cover is in the form of a single life, non-registered policy paid for by the employer, with benefits under trust to provide a lump sum to an employee’s family in the event of the employee’s death.

Policies can include terminal illness benefit and the cover can be level, decreasing or increasing. Premiums can also be level or renewable and most plans will include a guaranteed insurability option to enable cover to be topped up following events such as marriage, the birth or adoption of a child, or an increase in the size of a mortgage.

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Although most of the life assurance providers now offer a plan, the market initially developed slowly with Bright Grey the first to introduce a plan in 2008, followed shortly afterwards by Zurich.

Part of the problem was the internet. Although relevant life policies share many of the characteristics of an individual contract, some insurers’ online sales facilities could not accept a plan written on the life of another.

This meant either reverting to a paper transaction for this business or delaying the launch of a plan until the investment in technology was justified.

The benefits of relevant life policies also made some insurers cautious according to Ian Smart, head of product development and technical support at Bright Grey. “There were concerns that we were exploiting a loophole and these plans would be abolished once the taxman got wind of them,” he says. “But, providing they are used appropriately, they are completely within the pensions legislation.”

Tax breaks

Certainly the benefits can be compelling. The structure of a relevant life policy makes it a particularly tax-efficient way to provide cover, both for the employer and the employee.

For employees, as it is not treated as a benefit in kind, there is no income tax or national insurance to pay on the value of the premiums. In addition, as the benefit is written in trust for the family or other beneficiaries, any payout is outside the employee’s estate for inheritance tax purposes.

Further, and thanks to their inclusion in the pensions legislation, payouts can also benefit from favourable tax treatment. Unlike traditional death in service schemes, the benefits paid out under a relevant life policy do not count towards the lifetime allowance for pension savings, currently £1.25m, but due to be reduced to £1m for the 2016-17 tax year.

As anything in excess of this limit is taxed at 55 per cent, this could potentially save a family receiving a life assurance payout of £500,000, a tax bill of up to £275,000.

There are also tax advantages for employers. In most cases the premiums will be treated as a business expense and will therefore qualify as an allowable deduction against corporation tax. This can slice a further 20 per cent off the premium.