Relevant Life Cover (aka Keyman Insurance) – tax efficient protection

Although life insurance is not something anyone likes to have to think about, should the worst happen to you, it is essential to have cover in place to protect your loved ones financially at what will be a very difficult time.

What is relevant life insurance?

Relevant life cover allows you to protect your dependants in a way that mirrors the death in service benefits that you may have had as a permanent employee. Not only can you take out a policy to protect you, you can also extend the cover to protect your spouse – as long as they are receiving a salary from the company.

In general relevant life policies provide life cover to the policyholder’s dependents and the funds are paid via a discretionary trust.  

Why are relevant life policies tax efficient?

  • The premiums are paid from the company, not out of your personal post-tax income.
  • Although your dependents would benefit from a pay-out, the cover is not seen as a ‘benefit in kind’, so does not need to be included on your P11D form each year.
  • No National Insurance is payable on the premiums, for the company, or those covered.
  • The premiums should be an allowable expense, offset against your company’s Corporation Tax bill.
  • The premiums are not counted towards your annual pension allowance limit.

How much money could you save?

At a basic level paying for a RLP through your company could save you upto 40% of the premium value.

For example, if you were to pay £50/month towards your current life cover policy, paid for out of your personal income, this is the equivalent of £83/month gross (as a higher rate taxpayer).

But if the £50/month premium is paid for by the company, no tax is payable, so it costs you £50 gross.

What restrictions apply?

  • This type of policy must include life cover, but not critical illness.
  • The policy will only cover employees until they reach the age of 75.

Why choose Relevant Life Cover?

Contractors using a One Man Ltd company can transfer the cost of life insurance to your business rather than find the cost personally from your post-tax income. In this way the new plan offers you substantial savings on any existing life cover that you pay for personally. It should also be possible to offset the premiums against corporation tax as a business expense.

Unlike the old company sponsored ‘Key-man’ insurance policies, where any pay-out on death belonged to the company and your dependents were taxed on the receipt of funds, this new policy is kept in trust to protect your dependents. An added bonus is that in most cases the benefits won’t be liable for inheritance tax as long as they are payable through a simple discretionary trust.

What happens if my circumstances change?

If you decide to return to permanent employment, you can still benefit from the tax savings by simply transferring your policy to your new employer. Your cover is written in trust making the plan easier to transfer. You can opt to pay the policy personally and this means that, unlike traditional death in service cover that is non transferrable by the employee, this policy can be kept in place irrespective of who you work for. Finally, despite any health issues that arise, you will not be medically underwritten again with this cover and so the policy can remain intact.

The advisers at Contractor Wealth can handle the whole application process for you, from setting up the policy initially to transferring it to a new trustee or helping your family to make a claim if the worst should happen.

For more detailed information talk to your accountant and we can make the introduction.

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