Whilst the death of a key employee can potentially have a devastating impact on a business, the effect on that employee’s loved ones can be even harder, both emotionally and financially. Just as a business can use insurance to protect itself from the impact of a death of an employee, it can also provide stability to the families of its directors and employees by creating a financial safety net should an employee sadly pass away.
Good employee benefits are often seen as an excellent way to recruit and retain your staff, and life insurance is no exception to this. However, whilst larger employers will often have a group policy in place to cover all their staff, for smaller enterprises with only a few employees such schemes are not always a cost-effective solution.
Relevant life plans (RLPs) are just one way to offer your employees a more cost-effective protection benefit, allowing you to use your business to provide cover for your staff and give them peace of mind should the worst happen. The premiums on these policies are paid for by the business, with the pay-out on death going to the family of the employee.
There are a number of benefits to taking out an RLP for both the employee and also the business owner.
Unlike standard life insurance products taken out by an individual, an RLP can represent a substantial saving in tax. These plans are taken out and paid for by the employer. They are usually an allowable business expense, which means they can be offset against a company’s corporation tax bill. In addition, the cost of the insurance is not treated as a benefit in kind so has no impact on the employees earnings, meaning they would not have an additional income tax or National Insurance charge, and there would be no National Insurance for the employer to pay on this. Therefore, for instance, an RLP with annual premiums of £1000 would only cost £800 after Corporation Tax deduction. By contrast, taking into account both employee income tax, employee and employer National Insurance contributions, a higher rate tax payer, perhaps a director, would have to take out nearly £1600 from the business to cover the same premium for a personal life insurance policy. That’s a substantial saving of nearly £800.
Unlike Group life schemes, an RLP is also considered separate to your pension pot. Any pay-outs from a group policy are governed under pension legislation, so if you have already accumulated a substantial pension, this could see you breaching the lifetime limit of £1 million, which means incurring significant tax charges. Instead, RLPs allow people to ensure they have the appropriate life cover for their whole family, without affecting pension contributions.
RLPs can also provide more extensive cover to individuals and their families, making these plans a more attractive option for many small business owners who may take a reduced salary but draw funds from dividends.
Whilst it is common for group life insurance products to provide three to four times an employee’s salary in the event of their death, RLPs can far exceed this, allowing you to ensure up to thirty times your total earnings not just your salary. This is of course dependent on age and provider.
Finally, if you or a fellow employee decides to leave the business, policyholders can take responsibility for paying the premiums, allowing them to take control of the policy. That means no new application, medical overview or underwriting. By comparison, under a group scheme employees leaving the business will need to arrange their own cover, meaning they will have to complete a new questionnaire. If they are an older worker or have had a history of health problems, this could lead to a significant increase in costs.
It’s all too easy to put issues like these onto the back burner and focus on the day-to-day tasks of your business, whilst the vast array of different products out there can mean choosing the right product difficult. However, an RLP can be an excellent, cost-effective incentive to your workforce or a more appropriate way to use your business in order to look after your family financially when you’re gone.
If you are looking to take out a relevant life plan for your business, by speaking with an adviser to discuss your requirements you can make all the difference in finding the best product to fit your business model.
By Richard Kateley, head of intermediary development at Legal & General