A relevant life policy is an effective way companies use to save tax and cost while providing life assurance for their major employees.
Working with small companies is generally more satisfying for professional advisers as they have better chance of using their services and advices to bring about better change and have impact on the success of the small companies.
Despite the essence of the quality of advice and professionalism of advisers, the cost attached to giving these advices are usually a big problem; therefore, it is important for professional advisers to offer their quality services at a lesser cost.
During our discussions last month, I mentioned the essence of using life assurance plans to safeguard the interests of the shareholders of a company. However, the system of most life assurance is based on how to protect the family of an individual rather than company; hence, this article will consider the way company can use that system in a way that saves money with great efficiency.
In most cases, individuals usually use part of their take-home salary to settle their life assurance. Though companies, in some cases, pay premiums on behalf of their director, the tax is still taken out of the cost, so there is no specific advantage attached to that system of payment. More often than not, a group of scheme is used by employers to provide life cover. Though there is usually no increase in any fund, these schemes used by employers are under the guard of pension regulations so that the company will benefit from cost savings and tax exemptions. Despite the appeal of these schemes, they neither offer any specific benefits of personal plans nor capable of attracting small companies with less than 20 people. Therefore, there is need for a third system that offers individual life cover plans for certain important employees and also provide cost savings and tax savings. This need for a third system ushers in relevant life policy (RLP). It is important to note that there is nothing hidden or mystical about RLPs as legislation has clearly made provision for them since 2013. Most of the known insurers are also capable of catering for the policy.
Just like other life assurance plan, after the death of a person, relevant life policy works by giving substantial inheritance tax-free money to the stated beneficiary. With RLPs, the trustees are allowed to award the sum of money to the family members of the deceased because the stated beneficiary is only a discretionary trust. The main disparity here comes from the special tax exemptions and premiums that will be paid by the employers. There is a lot of tax saving for both the employee and employer because both sides are exempted from National Insurance as the premiums are not seen as a benefit in kind and they have no effect on the position of the employees.
The company will also escape corporation tax because the premiums are seen as a trading expense. For this to work effectively, the benefits are fully, essentially and exclusively referred to as being used for the purposes of trade; however, there is hardly any issue with this, unless there are certain unusual situations. Interesting Outcome
Apart from the fact that these tax savings mean the new cover can be implemented at about half of what would have been spent to implement personal policy, the results are also very appealing when the arrangement on ground are also reconsidered.
If £100, for instance, is paid per month for £100,000 cover on a personal basis by a director and assuming the monthly take-home salary of the director is reduced by £100. As the manager gets less National Insurance and less gross salary from his company, a total of £196 would have been saved by the company for each month. Provided there is no rise in medical underwriting concerns and the client is still insurable, a new relevant life policy is funded by the company with the £196 saved per month for cover of £196,000. The old policy will be effectively cancelled, once the new policy is established. As a result of this, both the director and the company are placed in the similar financial position as before the use of the new policy; however, the life assurance of the director is almost twice the value it was before.
In case the existing costs are a source of concern, the same level of cover could be used as an alternative at almost half of the cost. In a manner different from other plans, annual premium increase and annual renewal paperwork for employer are not required. Similarly, the process involved in setting up the plans is simple and devoid of any restrictive rules.
For individuals with substantial pension entitlements, they have a lot to gain from relevant life policies. Because standard group life schemes are established on pension rules, they affect the annual contribution allowance of each member and when the person dies, any payout will be taken as part of the overall maximum that is buildable in a pension.
Resultantly, high-paid executives will endure an unpleasant tax liability. RLPs, on the other hand, do not concern pensions and the allowances of the member are untouched. RLPs also offer portability as an added advantage. A standard scheme will cease once an employee leaves a company; however, in the case of RLP, the premiums can be used by another employee or employer when the employee using it leaves a company.In a situation the health of a member is failing or a brand-new cover experience is found to be unavailable or costly, it is important to keep the plan unchanged. However, there are certain limitations attached to RLPs:
As it has been stated earlier, the payment made on the death of an individual forms neither part of the income tax liability nor the pension lifetime allowance of the person. Due to the payment of the money being based on discretionary trust, the money is not paid into the estate of the employee; hence, no inheritance tax will be paid on it. Most times, the sum of money is paid directly to the beneficiary of the deceased member (usually children and spouse) by the trustees of the plan.
There are some options that could be used in paying the money, and they are:
Quotes shown are for a 40 year old male who doesn’t smoke. Policy is £100,000 life insurance cover for ten years with a fixed premium. Example is for illustrative purposes only and was correct on 21/11/2016.
The most common form of protection, ordinary term life cover pays a lump sum to your family if you die within a certain time-frame. Most policies will also pay-out if you’re diagnosed with a terminal illness and have less than twelve months to live
Critical Illness Cover provides a cash lump sum if you suffer from a range of serious conditions within a set time-frame. The money is normally used to pay the bills and provide financial security while you’re on the road back to health
If something serious happens to stop you working - for months, years, or even for life – you’ll want to know you have financial security and that the bills are paid. Income Protection gives you just that, paying a percentage of your income all the time you’re unable to work.
The NHS is groaning under the weight of the UK obesity crisis and newer, more effective medical treatments for a range of illnesses often aren’t available. Private medical cover makes ‘going private’ much more affordable – giving you access to more treatments, shorter waiting lists, and first-class care.
Most company directors are savvy enough to have life insurance, but very few realise they can save up to 53% by taking advantage of a Relevant Life plan.
Group Life and / or Health Cover is the most cost-effective way to provide peace of mind and financial security for the families of your employees.
Key Person Insurance - often called Key Man Cover - is an insurance policy bought and owned by a business to protect its own interests. Cover is provided in the event that an important staff member is suddenly unable to work through critical illness and/or death.
Shareholder Protection Insurance is designed to give you peace of mind in the event that a shareholder in a Limited Liability Company, a member of a Limited Liability Partnership (LLP), or a partner in a partnership dies or is diagnosed as critically ill.
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