November 29th, 2022
4 important questions to ask your employer about relevant life cover
In September, we discussed four key types of life cover and how they could benefit you and your loved ones in the coming years.
However, one key type of life insurance that we didn’t explore is relevant life cover, a form of business protection provided by an employer to an individual.
Relevant life insurance is a popular form of death in service benefit for company directors, senior managers, or staff members in small companies that don’t qualify for group cover.
This type of cover involves an employer paying a life insurance premium on behalf of a single employee. In the event of the employee’s death or terminal illness diagnosis, they or their family usually receives a payout from the provider.
If your employer offers you relevant life cover, many questions could spring to mind. While having your employer pay your life insurance premiums sounds like a great deal, you could be unsure about how the arrangement works.
So, here are four important questions to ask your employer about relevant life cover.
1. Am I liable for any payments or costs?
This is an essential question to begin with, because for most forms of cover, an individual pays for their own life insurance costs. If you took out cover of your own accord, you would be required to pay the monthly premiums out of your own pocket.
In this case, though, a relevant life cover plan is paid for by your employer. There are not usually any charges to the employee – although it is important to discuss your specific circumstances with your employer.
Crucially, there may be an element of “salary sacrifice” like any workplace benefit – but this is likely to be a negligible cut to your take-home pay, compared to paying your life insurance premiums out of pocket.
This arrangement could be highly beneficial for high earners with significant wealth, as it could shave valuable pounds off your monthly expenditure and mitigate your tax liability (more on this later).
If your employer asks you to pay fees, or you have concerns about the plan you are offered, speak to your financial planner.
2. How are my beneficiaries paid if I pass away?
In most cases, life insurance payouts are directed to your beneficiaries through either a lump sum or gradual income once a successful claim is made.
With a relevant life policy, the funds are usually written into a trust from the beginning. Often, providers use a discretionary trust, which is managed by an external trustee and paid directly to your beneficiaries if you die while the plan is active.
The regularity of payments (either a lump sum or a sustained income made up of smaller payments) and the beneficiaries who receive the funds can be dictated within the terms of the trust. Then, the plan’s trustee (usually a trusted professional) will see that your wishes are carried out once you pass away.
Remember, the type of trust used – and therefore how and when your beneficiaries are paid – can vary between plans.
So, it is important to discuss the details of your specific plan with your employer, and if necessary, your financial planner.
3. What are the tax implications of relevant life cover?
One of the most attractive benefits of a relevant life cover plan is that it can be extremely tax-efficient for both you and your employer.
Your employer can usually treat the plan as an “allowable expense” for Corporation Tax, and they won’t generally pay National Insurance contributions (NICs) on this benefit either.
For you, the tax efficiencies of a relevant life cover plan are far-reaching. This form of remuneration usually does not affect:
- Your pensions Lifetime Allowance (LTA), meaning you can continue to build up your pension pots without concern, unlike some pension-linked insurance plans
- Your pensions Annual Allowance, so you can make use of the full allowance (£40,000 or 100% of your total earnings, whichever is lower, as of the 2022/23 tax year)
- The Inheritance Tax (IHT) paid on your estate, seeing as the funds are placed in trust.
Of course, the specific tax implications of your relevant life cover plan will depend on your tax band, the unique package that you are offered, and many other factors.
So, as usual, you should discuss the details of your scheme with your employer and your financial planner, who can conduct a full review of how your plan might affect your tax liability.
4. What happens if I move jobs or retire?
If you are not yet close to retirement and plan to explore other career options before you stop work, you might be wondering what happens to your relevant life cover scheme if you move jobs.
The answer to this question depends on your current and future employer; however, in many cases, the plan can be moved to your new place of work when you start your new position.
Alternatively, the plan will cease, and a new life insurance scheme can be put in place by either you or your new employer.
If you retire, your plan usually remains in place until you are 75, at which point cover lapses. Relevant life cover is known as a “death in service” benefit, meaning it is mainly designed to pay out if you die while still in employment and for a limited time afterwards.
However, individual plans vary, so it is essential to clarify these details with your employer when the plan is drawn up.
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This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.