How to save up to 49% on the cost of life insurance

Where there is a need to provide a lump sum on death to protect their families, directors should consider the most cost-effective and tax-efficient options. 

Often directors of small owner-managed businesses have relied on individual term assurance.  Where premiums are paid through the business, there is a liability to tax and national insurance.  If cover is not written under trust, benefits form part of the individual’s estate for inheritance tax.  Where premiums are paid personally they are paid out of taxed income.

One solution is to establish a tax-efficient, one member death-in-service scheme under ‘relevant life rules’. For example, a company director paying tax at the higher-rate can save 49 per cent, by paying for their personal life insurance via a relevant life plan rather than a term assurance policy.

The benefits include:

  • the policy premiums paid by the business are likely to be an allowable deduction against corporation tax,
  • there is no liability for national insurance for the company or the employee,
  • there is no income tax liability for the employee,
  • the benefits are paid tax free to their nominated beneficiaries under trust,
  • the policy premiums do not form part of an individual’s annual or lifetime allowance,
  • on leaving service there are a number of options available to continue the cover, and
  • benefits are provided under a discretionary trust.

    Significant cost savings can be achieved by using cover under the ‘relevant life rules’.  A saving of 49% can be achieved by using relevant life rather than term assurance.

    The following example assumes an annual premium of £2,000,  19% corporation tax, 40% individual tax rate, and national insurance at the 2% additional rate for the employee and 13.8% for the employer (2017/18).

Another option is to use a group life assurance policy to include directors and employees.  By having a larger scheme, employers can obtain free cover limits under which there is no medical evidence.  For example, the free cover limit might be £500,000 and the benefit 4 times basic salary.  In this example, if an employee or director has a salary of £100,000 there are no medical questions or underwriting because the benefit is under £500,000.

If you would like to know more about relevant life cover or other benefits available through your business, please contact Dion Prideaux-Reynolds on 01635 551333.

 

 

 

 

Latest news

News

05 Apr 2024

Investment market update: March 2024

Read more

News

05 Apr 2024

5 practical tips that could help you set realistic financial goals

Read more