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However, the demands of day-to-day leadership and management often mean this is forgotten or pushed further down the ‘to do’ list.
For many people there will be some death benefit cover in place to ensure any financial liabilities are cleared should a claim be made, but is this enough, and is it being paid for in the most tax efficient way? And wouldn’t it be great if the business could pay the premium too?
Well, it can.
There are two options available to do this: death in service cover – also known as group life assurance or group income protection - and relevant life cover.
Each means the company pays any premiums and also arranges for payments to be made outside of the individual’s estate on death. A win, win - so far. Let’s look at each in more detail:
Death in service cover
How does it work?
Provided by a group life assurance policy, it can be offered for groups of two or more employees.
An employer can provide a fixed sum on death or a multiple of pay and, as they are payable via a trust, they are usually free of inheritance tax. Pre-existing health conditions are normally covered as long as an employee is at work in their normal full-time role when cover starts and not off sick.
What are the advantages?
Insurers generally offer a level of cover (“free cover limit”) to each individual without the need for medical evidence of good health. The larger the group, the higher the level of “free cover” on offer. This can make group schemes far more attractive than individual life assurance where pre-existing conditions are normally excluded.
A scheme can be structured to offer different benefits to different levels of employees, allowing any senior management team to have a higher benefit than the rest of the workforce, if required.
Premiums for group life assurance are tax deductible as a business expense and many of these policies also come with added benefits such as grief counselling and probate support.
For example:
A company with 10 employees elects to offer cover to all employees at 2 x annual salary. Company directors take cover at 4 x total annual remuneration. The free cover limit offered by the insurer is £500,000, allowing everyone to be covered up to this level without any medical underwriting. The company pays the annual premium. This is not a benefit in kind for employees and, as such, does not need to be taken into account for tax.
Relevant life insurance
How does it work?
The business takes out the cover on the employee, written under trust, so the employee’s beneficiaries receive it.
Cover is based on a multiple of the employee’s annual earnings, including salary, bonuses, pension contributions and dividends. Additionally, relevant life offers the potential to insure for higher multiples of cover than group life assurance.
The plan would pay out on the death of the employee whilst the cover is in force.
It’s commonly used by owner-directors to provide cover for their families and could even be used as a top-up to any death in service benefit.
What are the advantages?
Premiums are normally treated as a business expense for corporation tax with no P11d liability for the employee.
High levels of cover are available with up to 30 times total remuneration allowed by some insurers.
Cover is written under trust so would not form part of the employee’s estate for inheritance tax purposes.
If you want to find out more, we are happy to take you through how we can put in place this valuable cover in a tax-efficient way through your business.
We know you remain as busy as ever but we can help you to put in place policies to protect your family now and for the years ahead - just get in touch.
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Small business services - essential advice for small business owners on protection, pensions and tax planning.
