Getting to grip with life policies
A great way to reduce the cost of life insurance is to buy cover that qualifies for full tax relief. If you are a basic rate taxpayer the tax relief cuts the effective cost by 20% and for higher earners, it can save 40% or even 45% of the premium.
What’s more, employers and employees do not pay national insurance contributions on the premiums – unlike many benefits in kind such as private medical insurance or the provision of a company car. So the effective cost saving is more than the pure income tax relief.
It isn’t currently possible for individuals to take out a new life policy that qualifies for tax relief, but employers can arrange insurance on the lives of their employees and directors. Sadly, self-employed people do not qualify. The employer gets tax relief on the premiums and the employees and directors don’t have to pay income tax on the benefit in kind of having the insurance.
If the employee then dies, their dependants can receive the death benefit payment free of both income tax and inheritance tax.
These plans can be arranged on an individual basis, and they are called ‘relevant life policies’. They are term assurance plans available to employees to provide an individual death in service benefit for an employee. Where there are several employees, they can be arranged on a group basis, known as ‘excepted group life policies’.
The employer decides which employees should be included and also the levels of cover. As a broad indication, insurance companies that operate these policies generally allow employees to have cover of up to about 20 times earnings, including bonuses and commission for those up to 40 years of age, and about 15 times from 40 up to the maximum of 75 years. These policies can only pay a lump sum and they can't include any extras such as critical illness insurance, although some may pay out shortly before death if the insured person has a terminal illness.
Another advantage of these plans is that the premiums do not count towards the pension ‘annual allowance’ – currently an annual input of £40,000. And if there is a claim, they do not use up any of the individual’s pension lifetime allowance, (currently £1.25 million for most pension scheme members) above which there may be a tax charge on pension death benefits. It is important to make sure that these types of policy are set up correctly.
There is no guarantee that the favourable tax position will apply in all cases and there are also other circumstances when the plan might not pay out in full. The cost of the plan may rise, making it more expensive than you are willing or able to pay.
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The information in this article does not constitute advice and should be used for informational purposes only. This content has been provided to Helm Godfrey by Taxbriefs.