Providing life cover for your loved ones in the event of your death is sometimes overlooked and ‘put off until tomorrow’ when potentially it could be too late.
It is hard to confront the Grim Reaper. Many people would rather not think about the ultimate end game. There is even a slightly bizarre fear that it is somehow ‘unlucky’ to do so in case it jinxes you.
However, the reality is that if you are a company director or higher earner with beneficiaries, it is never too early to start thinking about life insurance.
And, if you work for a small or medium sized business, a Relevant Life Policy (RLP) could be the answer.
Tax-efficient and generally cost-effective, they are like traditional life insurance in many ways – reflecting the age, health and lifestyle of the individual. The main difference is that the policy is taken out and paid for by your employer on your behalf.
Written into trust from the outset, it guarantees a lump sum to the employee if they are diagnosed with a terminal illness while employed during the policy term – or to their beneficiaries if they die.
Quite often, with bigger companies, cover is provided by an employer via a group life assurance scheme, but when a business is smaller and a scheme is not in place or affordable an RLP can be an attractive option.
Richard Cooper, business development manager at the London Institute of Banking & Finance, told FT Adviser: “RLPs allow employers to provide all their employees with tax-efficient death-in-service benefits.
“They can be particularly attractive for high-earning employees or directors who have substantial pension funds and who do not want their benefits to form part of their pensions lifetime allowance.”
Premiums, which tend to be quite reasonable in the case of non-smokers, often £20-30 a month for £350,000 of cover, are not assessed as a benefit in kind. This means there is no need for those insured to pay any income tax on the package and the employer can reduce its corporate tax bill.
Pay-outs from an RLP do not normally form part of an individual’s estate for inheritance tax purposes. This generally means that your benefactors will receive a tax-free lump sum if you die.
However, to qualify as an RLP, certain conditions must be satisfied:
- The plan must provide for a lump sum on death before the age of 75.
- If an ill-health benefit is included, it can apply only during employment.
- The policy cannot have a surrender value.
- Any benefit must be paid to an individual or a charity.
- The main purpose of the policy must not be tax avoidance.
RLPs do have some drawbacks.
Mr Cooper went on: “Policy rules are less flexible than those in traditional life cover. For example, once a relevant life plan is set up it cannot be changed. And cover is for an agreed duration, which means the plan must end once the person covered reaches 75.
“Lump sums must be paid out through a discretionary trust. That gives trustees the power to decide when beneficiaries will be paid if a person dies, as regular payments are not possible.
“In addition, relevant life plans only provide death benefits. Critical illness is not covered, unlike some life insurance policies. And beneficiaries are normally restricted to family members and dependents.”
RLPs are not available where there is no employer-to-employee relationship. For example, sole traders, equity partners of a partnership or equity members of a Limited Liability Partnership.
An independent financial adviser can help you shop around and find the best deal. There are plenty out there.