What is Relevant Life Cover and How does it work?

As a business owner, contractor, or employee, it is essential to understand various insurance options to protect yourself and your family financially. One such option is relevant life insurance. In this article, we will explore the concept of relevant life cover and explain how it works. We will also discuss the benefits of a relevant life insurance policy and examine the specific aspects of a relevant life plan for contractors and a relevant life policy with a critical illness. By the end of this article, you will have a clear understanding of what is relevant to life insurance and how it can benefit you.

Relevant life insurance is a tax-efficient, employer-funded life insurance policy designed for employees, directors, and contractors of a company. It provides a death-in-service benefit, paying out a lump sum to the employee's beneficiaries in the event of their death or diagnosis of a terminal illness. The main advantage of relevant life insurance is its tax efficiency, as premiums are paid by the employer and are generally deductible as a business expense, resulting in significant tax savings for both the employer and the employee.

A relevant life insurance policy is a type of term life insurance, which means it provides coverage for a specified term, usually up to the employee's 75th birthday. The policy can be set up as a level term or decreasing term cover, depending on the employer's preference and the employee's needs. With level term cover, the lump sum payout remains the same throughout the policy term, while with decreasing term cover, the payout reduces over time, typically in line with a decreasing debt or mortgage.

The following are some key features of a relevant life plan:

• Tax efficiency:
  Premiums paid by the employer are generally tax-deductible, while the employee does not have to pay income tax or National Insurance contributions on the premiums. Additionally, the payout is usually free from inheritance tax, as long as it is paid into a trust.


• Trust arrangement:
  A relevant life policy is set up in a trust, which ensures that the payout goes directly to the employee's beneficiaries, bypassing their estate and avoiding inheritance tax.


• Portability:
  If an employee leaves the company or becomes self-employed, they can usually transfer the policy to a new employer or convert it into a personal life insurance policy, subject to certain conditions.


• Flexibility:
  A relevant life policy can be tailored to the employee's needs, allowing for adjustments in the level of cover, policy term, and other features.


• No impact on pension lifetime allowance:
  Unlike group life insurance schemes, the payout from a relevant life policy does not count towards the employee's pension lifetime allowance, ensuring that they can maximise their pension savings without tax penalties.

Relevant life insurance offers several benefits for both employers and employees:

For Employers:

• Tax savings:
  Premiums are generally tax-deductible as a business expense, reducing the company's corporation tax liability.


• Staff retention and attraction:
  Offering relevant life cover can enhance an employee benefits package, making it more attractive to potential hires and helping to retain existing staff.


• No need for a group life scheme:
  For smaller businesses or those with a limited number of employees, setting up a group life insurance scheme may be cost-prohibitive or administratively burdensome. A relevant life policy provides an alternative solution, allowing employers to offer life insurance to their employees on an individual basis.

For Employees:

• Tax-efficient life cover:
  As the employer pays the premiums, employees do not have to pay income tax on the premiums, saving them money.


• Estate planning:
  Estate planning: Since the policy is set up in a trust, the payout goes directly to the employee's beneficiaries, bypassing their estate and avoiding inheritance tax.


• Financial security:
  A relevant life policy provides a valuable financial safety net for the employee's family in the event of their death or diagnosis of a terminal illness, ensuring their loved ones are financially protected.


• Portability:
  If the employee leaves the company or becomes self-employed, they can often transfer the policy to a new employer or convert it into a personal life insurance policy, maintaining their coverage without interruption.

Relevant life insurance is particularly beneficial for contractors, as it offers tax-efficient life cover without the need for a group life insurance scheme. Contractors working through their own limited company can take advantage of a relevant life policy, with the premiums paid by the company and treated as an allowable business expense. This arrangement provides substantial tax savings for both the contractor and their limited company, making relevant life insurance an attractive option for contractors seeking cost-effective life cover.

Some insurance providers offer a relevant life policy with critical illness cover, which provides additional financial protection in the event of the employee being diagnosed with a specified critical illness. This added coverage can help alleviate the financial burden associated with severe illnesses, allowing the employee to focus on their recovery.

However, it is essential to note that the tax treatment of a relevant life policy with critical illness cover may differ from that of a standalone relevant life policy. In some cases, the critical illness premiums may not be tax-deductible, and the payout may be subject to income tax. It is crucial to consult a tax professional or financial advisor to understand the implications of including critical illness cover in a relevant life policy.

Understanding what is relevant life insurance and how it works is essential for businesses, contractors, and employees seeking tax-efficient life cover. A relevant life insurance policy offers numerous benefits, including tax savings, financial security for employees' families, and enhanced employee benefits packages. For contractors, relevant life insurance presents a cost-effective solution for a life cover that can be easily integrated into their limited company structure. With the option to include critical illness cover in some policies, a relevant life plan can provide comprehensive financial protection for employees and their families.

When considering a relevant life policy, it is crucial to consult a financial advisor or insurance professional to ensure that the policy is tailored to your specific needs and circumstances. By doing so, you can secure the financial future of your loved ones while enjoying the tax benefits* that relevant life insurance has to offer.