In the unfortunate event of the death of a key employee, businesses can protect themselves from any potentially devastating consequences by taking out insurance. However, this can also be a two-way process. Small businesses can provide a financial safety net to the families of their directors and employees by taking out Relevant Life Plans (RLPs), thus offering some stability during the emotional and uncertain time following the death of a loved one.
RLPs are life insurance policies where the premiums are paid for by the business and which pay a lump sum if the insured employee passes away or is diagnosed with a terminal illness. In this case, it is the family of the employee who receive the pay-out, rather than the business itself. RLPs are available to anyone who is classed as an employee including company directors of Limited companies.
Whilst larger companies generally have group life insurance policies to cover their staff, for smaller businesses with only a few employees it is not always possible to provide this. In this case, RLPs are just one way to offer your employees a more cost-effective protection benefit, whilst also using your business to provide cover for your staff and give them peace of mind should the worst happen.
However, despite this, few people have heard of an RLP, making the uptake of the policy very small compared to the number of people who could benefit and save. In fact, recent Legal & General research has shown that only 30% of over 800 businesses surveyed for the “State of the Nation’s SMEs” report have heard of an RLP. However, the report also showed the value of these plans. Of those who had not heard of RLPs, 73% were receptive to the product after it was explained to them, with only 9% saying they would definitely not take out cover. If you run a small business, it might be worth your time to speak to your adviser about RLPs.
RLPs can also offer businesses substantial tax savings for the life assured, unlike standard life insurance products taken out by an individual.
These plans are usually an allowable business expense, meaning they can be offset against a company’s corporation tax bill. The policies are also not seen as a P11D benefit for the life assured and this means that once a Corporate Tax deduction of 20% is taken into account, premiums could be almost 50% cheaper for higher rate tax payers when compared to personal life insurance policy premiums.
For example, an RLP annual premium costing £1000 would in effect only cost £800 once this deduction has been considered. In contrast, for a personal life insurance policy, once employee income tax and both employee and employer National Insurance contributions have been factored in, the amount of gross salary required to be taken out of the business to cover the same premium would be almost £1600.
RLPs are an attractive option for high earning individuals too, such as directors, who are looking for lump sum benefits without affecting their Pension Lifetime allowance. Many group life schemes are governed by pension legislation meaning any payouts may be considered part of your total pension pot. However, if you have already accumulated a substantial pension this may not be appropriate, as exceeding the lifetime limit of £1 million will mean incurring substantial tax charges. RLPs, on the other hand, ensure people have adequate life cover for their family without affecting pensions contributions. A win/win situation.
RLPs can also provide more extensive cover to individuals and their families. Depending on age and provider, they can provide up to thirty times your total earnings, whereas group life insurance products insure three or four times your salary. This important distinction between your total remuneration and salary may be especially crucial for business owners who take a small salary, but a larger dividend.
Finally, should you or a colleague decide to leave the business, RLPs can continue to provide insurance for the individual if they take over responsibility for paying the premiums due. This simple process means no new applications, medicals or underwriting are required, which may be especially important for older workers or those who have had a history of health problems to avoid a significant increase in cost.
As ever when taking out insurance, it is important to speak with an adviser when considering RLPs for your business, in order to discuss your specific requirements and find the best product for you and your company.
With the everyday challenges of running a business, it is easy to put issues like this aside. However, with employees increasingly being attracted to business benefits that include more than just salary, a Relevant Life Plan can be a great way for small businesses to stand out and attract key talent with a tax-efficient protection solution.
By Richard Kateley, head of intermediary development, Legal & General