For small business owners burdened with hefty taxes on conventional life insurance coverage for employees, the relevant life policy offers a valuable alternative with its range of tax benefits. This unique life assurance cover is designed to provide a death-in-service benefit for employees of small companies that may not qualify for a registered group life scheme. As we delve deeper into this article, we will explore how the policy works, its tax advantages, and the significance of the Relevant Life Trust in ensuring a smooth implementation.
How the Relevant Life Policy Works
Despite its numerous benefits, the relevant life cover remains underutilized by many businesses. Let’s unravel how this policy functions. Targeted at employers who seek to offer a death-in-service benefit for their staff, the relevant life policy comes into play for small businesses that do not meet the required employee count for a registered group life scheme.
The employer pays the premiums, naming the employee as the insured. In the unfortunate event of the employee’s passing, the benefits are paid out as a tax-free lump sum to the family. It’s important to note that the relevant life policy provides coverage only until the employee reaches the age of 75. Unlike some life insurance policies, there is no surrender value attached to this cover, and discontinuing premium payments will result in policy cancellation without any refund. The benefits are payable through a trust, distinct from pension funds designated for high-earning individuals.
Tax Advantages of the Relevant Life Policy
The relevant life policy offers attractive tax benefits, making it an appealing option for employers and employees alike. Here are the key tax advantages:
- Corporation Tax Relief: Premiums paid by the employer for the relevant life policy are not considered benefits in kind, entitling the employer to Corporation Tax Relief.
- Tax-Free Benefits: The lump-sum benefits paid out to the employee’s family upon their death are entirely tax-free, providing much-needed financial support during challenging times.
- National Insurance Exemption: Neither the employer nor the employee is subjected to National Insurance obligations related to the relevant life policy.
Understanding the Relevant Life Trust
When opting for a relevant life policy, the establishment of a Relevant Life Trust is a crucial step. The employer is required to complete the application form for the trust, and in some cases, the trust may need to be set up before the policy issuance. The employer typically serves as the initial trustee, with the option to add additional trustees through an additional deed or draft. Once the trust is established, all future interactions pertaining to the policy will be conducted between the insurance carrier and the trust. It’s important to note that terms and conditions may vary among different insurance providers.
Letter of Wishes
For added peace of mind and clarity, the insured can choose to draft a letter of wishes specifying when they would like their beneficiaries to receive the policy benefits. Although not legally binding, the trust will consider the contents of this letter when disbursing the benefits. The letter of wishes offers guidance to the trustees and ensures the insured’s intentions are taken into account.
Conclusion
The relevant life policy presents a powerful tool for small business owners seeking a tax-efficient way to provide death-in-service benefits to their employees. With its Corporation Tax Relief, tax-free benefits, and National Insurance exemption, this policy offers a host of financial advantages. By establishing a Relevant Life Trust and considering a letter of wishes, employers can further enhance the effectiveness and clarity of this valuable life assurance cover. As businesses navigate the complexities of insurance, the relevant life policy stands out as a compelling solution that prioritizes the welfare of both employees and employers.
