Relevant Life Policy and the Tax Benefits Available
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Until recently, if a company director wanted personal life insurance, they had to pay for it out of their own income, from which tax and National Insurance had already been deducted.
However, legislation has recently changed and this has allowed four life insurance companies to come up with a tax efficient innovative product called a Relevant Life Policy. A Relevant Life Policy is in effect a death in service life insurance. However, unlike larger companies who have 10 or more employees and can apply for a group death in service policy, the policy caters for smaller companies with fewer than five employees or directors.
Unlike a group life policy, which is normally restricted to two or four times the annual salary, the relevant life policy can go up to 20 times the annual salary plus dividends and P11D benefits such as company car expenses, etc. The premiums are paid for by the limited company before tax is deducted, thus offering big savings to company directors. The main restriction is that the cover can only be for life cover and cannot include critical illness cover or waiver of premium. A typical scenario would be:
A small limited company with husband and wife as directors: the husband earns a £20,000 basic salary and £30,000 per annum in dividends; the wife earns a £10,000 basic salary and £10,000 in dividends. Depending on the particular insurance company and the applicants’ ages, the husband could get a policy for £1 million; the wife could get a policy for £400,000. Even though the company owns the policy and pays the premiums, the benefit is normally tax-free as the relevant life policy is set up under a trust. The policyholder can choose the beneficiaries such as dependents or spouse, etc.
Most Relevant Life Policies are paper based applications and can only be accessed by regulated intermediaries, such as independent financial advisers.
The four providers of Relevant Life Policies are currently: Bright Grey, Zurich, Pru Protect and Scottish Provident. The main conditions for the life insurance to qualify as a Relevant Life Policy are as follows:
The plan must provide a lump sum on death before the age of 75.
The policy cannot provide any other benefits such as critical illness or disability benefits.
The policy is classed as a term assurance plan and therefore has no surrender value.
Any benefit paid from the policy must be paid to an individual or a charity and this can be paid through a trust.
The main purpose of the policy must not be for tax avoidance only.
This type of cover will prove to be a very attractive option for some and to some extent it makes up for the loss of pensions life assurance, which was discontinued by the government.
Source by Damian Youell
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