ProtectionMar 23 2015

Making life cover relevant

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Making life cover relevant

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.

Target markets

The way in which these policies are structured means they are suitable in a number of different circumstances. As benefits paid out under a relevant life policy do not count towards the lifetime allowance, they are particularly attractive to employees who have already accrued a significant pension pot.

This includes employees who have already been granted protection for their lifetime allowance. For these individuals, joining a standard group life scheme can be particularly hazardous as it invalidates this protection, pushing any excess pension pot into the 55 per cent tax bracket, as well as the potential pay-out from the life assurance.

These high earners are where Alex Pickard, senior consultant at PMI Health Group, has seen the most interest from large employers. “Employers recruiting high earners should be asking whether they have protection already, or if they are close to the lifetime allowance, to ensure they use a relevant life policy for their death benefits,” he explains.

While there has been interest from high earners, small groups are arguably the largest market for these plans. Although it has become easier for these companies to arrange traditional group benefits, choice can be much more limited where there are fewer than 10 employees within a scheme, with this lack of competition pushing up the cost of cover.

As well as offering them to employees, the insurance also appeals to company directors looking to secure savings on their life cover and push more expenses through the business.

Rather than pay for an individual policy themselves using taxed income, or being charged tax and national insurance on any group life cover under the benefit in kind rules, their employer can take out a relevant life policy on their behalf at a much lower cost.