Relevant life policies explained

Business owners should investigate switching death-in-service policies for relevant life policies. We outline the benefits, including tax advantages and portability, which make the policy such an attractive consideration.

A relevant life policy is, at its most simplistic, a life insurance policy that is set up to provide a death benefit for an employee.

Like a death-in-service policy, a relevant life policy can provide a lump sum to an employee’s family and dependents should the unthinkable happen. However, unlike a death-in-service policy, a relevant life policy sits outside of an individual’s pension provisions meaning any pay-out will not be subject to a lifetime allowance test. Relevant life policies also bring attractive tax advantages for business owners and company directors.

Death in service insurance policies are a common benefit provided to employees by their employers. They are typically offered through a pension scheme and count towards the tax-free pension allowance, currently £1.03M.

With death-in-service schemes regularly offering up to four times annual salary it would be very easy, particularly for company owners who may have made generous contributions into their pension funds, to exceed that £1.03M threshold should a claim be made. Any pay-out could be reduced by a lifetime allowance excess tax charge leaving less money to support surviving dependents.

Relevant life policies first appeared in response to the reduction of the tax-free pension threshold. They sit outside of an individual’s pension pot meaning that any pay-out will not be subject to lifetime allowance limits, and that is one reason why they are proving popular with business owners and company directors.

There are other tax advantages too. Relevant life policies are considered a business expense and are therefore paid before taxable profits are generated and they do not require any contribution from the employee or count as a taxable benefit in kind for the employee.

Another important advantage is that relevant life policies are portable. If an employee leaves the company, or the firm is wound up, the valuable death-in-service benefit will be lost. Replacing such cover may prove expensive or unobtainable, especially for older members or those with pre-existing medical conditions.

The responsibility for a relevant life policy however can be transferred to the member, allowing the member to take over the premium payments to maintain the cover even after they have left the original sponsoring employer.

But there are important restrictions to consider. Relevant life policies cannot include critical illness cover. This means that business owners looking at relevant life policies as an alternative to personal life insurance contracts will need to explore separate critical illness cover which is likely to add additional cost. In addition, relevant life policies will generally require full medical underwriting on the life assured, unlike death-in-service benefits, increasing the amount of time and administration in setting up such plans, which may not be feasible for a large or transient workforce.

It is important that business owners take independent advice to ensure any new applications or changes to existing cover are appropriate for their individual business and personal circumstances.

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