How relevant life plans can help future-proof your business

  • Describe how relevant life plans work
  • Identify some limitations of RLPs
  • Explain the advantages of RLPs
How relevant life plans can help future-proof your business

This summer the press has been full of talk about the UK facing a credit crunch and possible recession.

UK inflation is higher than it has been for decades, with some predicting it could hit 18 per cent. Markets are jittery and people are conserving their funds. All of this has an impact on investment values and consequently on advice fees.

So what can you do, as a financial adviser, to recoup your losses? Preferably something that adds value, protects clients and might help you reduce costs.

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One thing you might consider is setting up relevant life plans (RLPs). These are particularly useful for clients with small limited companies who often pay for their life insurance directly from their net income. 

A small limited company can pay life insurance directly, and, if it is set up correctly, a relevant life plan can be very tax-efficient and reduce the overall costs to both companies and their directors. 

What is an RLP?      

An RLP is an insurance policy that a business can take out to provide life insurance for an individual employee, including employed directors. In this way, RLPs allow employers to provide all their employees with tax-efficient death-in-service benefits.

They can be particularly attractive for high-earning employees or directors who have substantial pension funds and who do not want their benefits to form part of their pensions lifetime allowance.

The primary purpose of the RLP is to provide a benefit on death before the age of 75. However, other benefits in respect of ill-health, disablement and death by accident may also be payable if the life assured is still in employment.

The policy is applied and paid for by the business and is written into trust from the outset. It pays out a lump sum to the employee if they are diagnosed with a terminal illness while employed during the policy term – or to their beneficiaries if they die.

RLPs comply with all the relevant life insurance legislation, which makes them tax-efficient for the employee, their beneficiaries and the business. This makes RLPs a valuable extra benefit that can be used alongside, or instead of, a group life insurance scheme. 

How does a plan qualify as an RLP?

RLPs benefit from favourable tax treatment. However, to qualify as an RLP, certain conditions must be satisfied, as follows: 

  • The plan must provide for a lump sum on death before the age of 75.
  • If an ill-health benefit is included, it can apply only during employment.
  • The policy cannot have a surrender value.
  • Any benefit must be paid to an individual or a charity – benefits will usually be paid by trustees through a trust and most providers provide a draft discretionary trust to use for this purpose.
  • The main purpose of the policy must not be tax avoidance. 

If a plan does not qualify as an RLP, for whatever reason, the policy will be treated for tax purposes in the same way as any other policy effected by an employer for the benefit of an employee.

What are the limitations of RLPs? 

RLPs do have some drawbacks.

Policy rules are less flexible than those in traditional life cover. For example, once a relevant life plan is set up it cannot be changed. And cover is for an agreed duration, which means the plan must end once the person covered reaches 75.