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The crucial difference between traditional life insurance and a relevant policy can be noted in the tax advantages offered by the latter. Relevant life insurance is a single cover taken out on the life of an employee or a director of a small company when the employer wants to provide a death-in-service benefit for employees. The benefits are paid in the form of a tax-free lump sum to the family of the insured after his death. As we progress further through the article we will learn more about its cost-effectiveness as compared to a conventional life assurance policy.
Why is the Policy Considered to be Cost-Effective for Businessmen?
Providing for a life assurance policy to employees, besides the usual salary package becomes a crucial means of strengthening the employee retention technique for employers, as the company slowly begins to establishing a foothold in the industry. However, sponsoring a conventional life insurance scheme would mean that employers are either paying from their post-tax income or else from the company’s account. There are no significant tax advantages involved here as it is considered to be a benefit in kind. The introduction of tax-efficient group life schemes however, has proved to be a huge relief for employers. But unfortunately, companies with less than 20 employees generally can’t secure the benefits of the group schemes owing to certain legislative limitations. This is where the relevant life cover turns to be a worthy investment. As already mentioned above, it can be taken out as a standalone cover on the employee of a small organization that doesn’t have the required number of employees to qualify for a registered group life scheme.
The tax advantages associated with this policy are discussed in detail below:
- The employer is entitled to corporation tax relief as the premiums paid by him are not considered to be benefits in kind but part of the trading expenses.
- The lump sum paid out to the family of the insured after his death is tax-free as well.
- The employee and employer are not required to fulfill the National Insurance obligations.
Therefore, it is only advisable that if you meet the legislative requirements of relevant life insurance, you invest in the same. Please remember that it only provides a life cover and no disability or critical illness cover. The cost effectiveness can thus be aptly realized if the cover is arranged as a single level term assurance rather without any element of critical illness cover. Here is a brief list of the legislative requirements, besides those already mentioned above:
- The cover can be secured by small business that can be a limited company, limited liability Company, partnership, or a sole trader.
- A discretionary trust needs to be set up, that will be in charge of paying out the benefits to the family of the insured after his death.
- The policyholder can’t enjoy the benefits as soon as he completes his 75th year.
- The policy generally can’t be used by employers for business expansion or else for covering business loans.
Sam Payn is an experienced finance blogger whose recent write-ups are focused on different types of insurance covers.