Relevant Life Cover for Directors: A Tax-Efficient Insurance Solution
When it comes to life insurance, company directors often face unique challenges. The need for protection is clear, but the traditional policies available in the market may not be the most tax-efficient option. Enter relevant life cover for directors—a tailored insurance solution designed to offer directors and business owners the financial protection they need, with the added benefit of tax efficiency.
In this comprehensive guide, we’ll explore what relevant life cover is, why it’s an ideal choice for directors, and how it can benefit both the individual and the company. Whether you’re a seasoned director or a business owner considering your options, this guide will provide valuable insights to help you make an informed decision.
What is Relevant Life Cover?
Relevant life cover is a life insurance policy specifically designed for company directors, business owners, and employees of small businesses. Unlike traditional life insurance policies, relevant life cover is set up and paid for by the company. This allows the company to offer life insurance benefits to its directors and employees without being classified as a group scheme.
One of the key benefits of relevant life cover for directors is its tax efficiency. Since the policy premiums are paid by the company, they are usually considered a business expense, which means they are eligible for corporation tax relief. Additionally, the premiums are not treated as a benefit in kind, so they are not subject to income tax or National Insurance contributions.
Why Directors Should Consider Relevant Life Cover
For company directors, relevant life cover offers a unique opportunity to secure life insurance benefits without the financial burden typically associated with personal policies. Here are some reasons why relevant life cover is an excellent choice for directors:
Tax Efficiency: As mentioned earlier, relevant life cover premiums are considered a business expense and are eligible for corporation tax relief. This means the company can reduce its taxable profits while providing valuable life insurance coverage for its directors.
No Benefit in Kind: Unlike other perks provided by the company, relevant life cover is not treated as a benefit in kind. This means that directors do not have to pay additional income tax or National Insurance contributions on the policy premiums.
Flexibility: Relevant life cover can be tailored to meet the specific needs of the director and their family. The policy can provide a lump sum payment in the event of the director’s death, which can be used to support the family, pay off debts, or cover ongoing expenses.
Portability: If the director decides to leave the company, the relevant life cover policy can be transferred to their new employer or converted into a personal policy. This ensures that the director and their family continue to receive protection, even if their employment situation changes.
No Impact on Pension Lifetime Allowance: Relevant life cover benefits are paid out separately from the director’s pension, so they do not count towards the pension lifetime allowance. This can be particularly advantageous for directors who are close to or have exceeded the lifetime allowance limit.
How Relevant Life Cover Works
To set up a relevant life cover policy, the company must take out the policy on behalf of the director. The policy is written under a discretionary trust, with the director’s family or other chosen beneficiaries as the beneficiaries of the trust. This ensures that the payout is made directly to the beneficiaries in the event of the director’s death.
The premiums are paid by the company, and as previously mentioned, they are usually eligible for corporation tax relief. The policy benefits are paid out as a lump sum, free from income tax and National Insurance contributions. Additionally, the payout is not subject to inheritance tax, provided that it is paid through a discretionary trust.
Benefits of Relevant Life Cover for the Company
While relevant life cover offers significant benefits for directors, it also provides advantages for the company itself. By offering relevant life cover, companies can:
Attract and Retain Talent: Offering relevant life cover as part of a benefits package can help companies attract and retain top talent. Directors and key employees are more likely to stay with a company that provides comprehensive life insurance coverage.
Enhance Employee Morale: Providing life insurance coverage can improve employee morale and job satisfaction. Directors and employees alike will appreciate the company’s commitment to their financial security.
Cost-Effective Solution: Relevant life cover is a cost-effective way for companies to provide life insurance benefits without the need for a full group policy. This is particularly advantageous for small businesses with a limited number of directors and employees.
Compliance with Regulations: Relevant life cover complies with HMRC regulations, ensuring that companies can offer this benefit without worrying about tax or legal issues.
Case Study: Relevant Life Cover in Action
To illustrate the benefits of relevant life cover for directors, let’s consider a case study:
John is a company director of a small IT consultancy firm. He wants to ensure that his family is financially protected in the event of his death, but he is also conscious of the tax implications of taking out a personal life insurance policy. After discussing his options with a financial advisor, John decides to take out a relevant life cover policy through his company.
The company pays the policy premiums, which are eligible for corporation tax relief. John’s family is named as the beneficiaries of the trust, ensuring that they will receive a lump sum payment if he passes away. Since the premiums are not treated as a benefit in kind, John does not have to pay additional income tax or National Insurance contributions on the policy. The policy is also portable, so if John decides to leave the company, he can transfer it to his new employer or convert it into a personal policy.
Through relevant life cover, John has secured life insurance protection for his family in a tax-efficient manner, while also benefiting his company financially.
How to Set Up Relevant Life Cover for Directors
If you’re a company director interested in setting up relevant life cover, the process is straightforward:
Consult a Financial Advisor: Speak with a financial advisor who specializes in relevant life cover to discuss your options and determine the level of coverage you need.
Choose a Provider: Select an insurance provider that offers relevant life cover policies tailored to your needs. Your financial advisor can help you compare different providers and policies.
Set Up the Trust: The policy must be written under a discretionary trust, with your chosen beneficiaries named as the beneficiaries of the trust. Your financial advisor or insurance provider can assist with this process.
Pay the Premiums: The company will pay the policy premiums, which should be eligible for corporation tax relief. Ensure that the premiums are paid on time to keep the policy active.
Review the Policy Regularly: It’s essential to review your relevant life cover policy regularly to ensure that it continues to meet your needs and that the level of coverage remains appropriate.
Conclusion: Why Relevant Life Cover is a Smart Choice for Directors
Relevant life cover for directors is a powerful tool that offers both financial protection and tax efficiency. By providing a tax-efficient life insurance solution, directors can ensure that their families are protected in the event of their death, while also benefiting their companies financially.
For directors and business owners seeking to secure life insurance coverage without the financial burden of personal policies, relevant life cover is an ideal choice. With its flexibility, portability, and compliance with HMRC regulations, it’s no wonder that more and more directors are turning to relevant life cover as their preferred insurance solution.
Whether you’re just starting out as a director or have been in the role for years, it’s worth considering relevant life cover as part of your financial planning strategy. Speak with a financial advisor today to explore your options and find the right policy for your needs.
