SME business owners often ask their accountants about both Relevant Life Insurance and Keyman Insurance. However, there’s sometimes a bit of confusion between the two, especially relating to the purpose and taxation of each policy.
This 10 minute read should equip accountants with all the knowledge they need to have at hand next time a client asks.
Relevant Life Insurance is a tax-efficient Life Insurance. While a policy covers an individual, a company pays the premiums. It’s therefore very similar to the Death in Service Insurance businesses might offer their staff, just for one person.
Despite a company paying the premiums, the payout is for the insured individual’s family or a charity, not the business.
Relevant Life Cover is available wherever there is an employer / employee relationship. Your clients can benefit from it providing there’s some kind of company vehicle to pay for the policy and as long as that company has at least one employee.
HMRC considers any benefit a Relevant Life Insurance policy pays out as:
What’s more, the premiums are:
Should the insured individual die, the policy pays out into a specially-drafted trust. This means that the payout avoids probate and is inheritance tax free.
In the table below, we’ve laid out a comparison between personal Life Insurance and Relevant Life Cover.
Imagine a policy which, on a personal basis, costs £100 a month. As your client has already paid taxes and National Insurance contributions on the funds they’re using to pay the premiums, a client who’s higher-rate taxpayer has to earn £196.21 within the business before they can pay a £100 personal Life Insurance premium.
However, your client pays premiums for Relevant Life Insurance from company funds before HMRC deducts taxes and National Insurance contributions. That means a Relevant Life Insurance policy could save them as much as 49% over a personal plan.
Personal Life Cover | Relevant Life Policy | Cost to Individual |
|---|---|---|
Monthly Premiums | £100.00 | £0.00 |
Employee NI Contribution | £3.45 | £0.00 |
Income Tax | £68.97 | £0.00 | Cost to Business |
Premium | £0.00 | £100.00 |
Employer NI Contributions | £25.86 | £0.00 |
Gross Cost | £198.28 | £100.00 |
Corporation Tax | -£37.67 | -£19.00 | Total Cost | £160.60 | £81.00 | Total Savings | 49.57% |
There are three common scenarios in which your clients might benefit from Relevant Life Cover:
As an accountant, one of your many jobs for clients with their own limited companies is to help save them tax.
If they’re considering paying for Life Insurance from net earnings, it’s worth suggesting Relevant Life Insurance instead because of its many tax efficiencies over personal cover.
Despite the considerable savings clients can make if they take out Relevant Life Insurance rather than a personal policy, many small business owners haven’t heard of this cover. Given this, simply mentioning it represents a big opportunity for accountants to add value for their clients.
Tom Conner
Director at Drewberry
It’s worth getting your clients to pop in their details into the Drewberry Relevant Life Insurance Calculator. It lets them see how the tax savings might apply to them and get instant online quotes.
EXPERT TIP
Our Relevant Life Insurance quote engine is unique. It’s the only one available to compare quotes for Relevant Life Insurance from across the entire UK market so your clients can be sure they’re getting the best deal.
Keyman Insurance — also known as Key Person Insurance — also insures an individual’s life. However, the recipient of the payout is a company (for the purposes of Keyman Insurance, that is a public limited company, a limited liability partnership or a partnership).
HMRC’s tax treatment of Keyman Insurance depends on the purpose of the policy and the recipient of the benefits. The rules are complicated and may appear quite arbitrary as tax treatment can differ depending on how the company uses the payout.
The most common tax treatment with Keyman Insurance is that the premiums do not qualify for corporation tax relief and HMRC considers any payout from the policy taxable as a trading receipt.
There are two exceptions to this:
IMPORTANT NOTICE
These rules are based on our understanding of HMRC’s rules surrounding Keyman Insurance. Tax treatment depends on your clients’ individual circumstances and is subject to change. While this covers the general consensus on HMRC’s taxation of Keyman Insurance, the final say is with your client’s local inspectorate of taxes.
Where HMRC does tax the payout from the policy as a trading receipt, your client must ‘gross up’ the level of cover from inception. That leaves the business with the amount net of tax.
Sam Barr-Worsfold
Business Protection Expert at Drewberry
Keyman Insurance protects business continuity. In the event of the death or earlier critical illness of the policyholder, the company receives the proceeds of the policy. Ut can use this for a variety purposes, such as:
If desired, clients can also add Critical Illness Insurance to their policy, which provides a payout should the key individual become critically ill.
Keyman Insurance | Relevant Life Cover | Ownership and Payment |
|---|---|
Your client’s company owns and pays for it. | Your client’s company pays the premiums; a specially-drafted trust owns the policy. | What’s Protected? |
Protects the business from the loss of a key individual and the financial impact this will have. | Offers a payout for the insured’s family / a registered charity should they pass away during the life of the plan. | Why Get Protected? |
Not only does it offer a contingency plan in the event of a key person’s death or critical illness, but lenders / investors etc. often require it to ensure they are protected. | Rather than buying personal Life Insurance to protect their families, your clients can use Relevant Life cover to make notable tax savings over paying for cover personally. | Taxation |
The default tax position is that premiums do not qualify for corporation tax relief and HMRC taxes any payout as a trading receipt. Two exceptions to this are where the policy is written on the life of an employee (who doesn’t have a significant controlling interest but is key to profitability), or where the policy covers a business loan. | Your clients use a Relevant Life trust so their beneficiaries receive the payout free from inheritance tax. Premiums qualify for corporation tax relief, which is unavailable when a client buys Life Insurance personally, hence the tax savings. It is also not a P11D benefit for your client. | Can I Add Sickness Insurance? |
Your client can add Critical Illness Insurance to their Keyman Insurance to protect against a range of insurer-specified critical illnesses as well as death. | Your clients must purchase protection against illness separately. HMRC does not allow you to add Critical Illness Cover to Relevant Life Insurance. Instead, clients might consider Directors Income Protection. | How Much Can I Cover? |
Different insurers assess business metrics and how key an individual is to the business differently. This ultimately impacts how much cover your client can secure, so it pays to speak to an expert who knows each provider’s various limits. | Your client covers a multiple of their remuneration (this can include both salary and dividend income). The maximum multiple of remuneration your clients will be able to secure is 25 times their earnings. |
Drewberry helps hundreds of small businesses from across the UK arrange cover such as Relevant Life Cover and Key Person Insurance. We also provide advice on pensions and investments.
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.
We thought the traditional way of introducing a client was a little antiquated and lacked transparency. Sending your partner an email and hoping for the best just didn’t wash with us!
We like to do things properly and we wanted to make this experience better.
That’s why we built our partnership portal. This lets you log in to your portal and have complete information on the clients you have introduced and know they are being dealt with in a professional manner.
We currently work in partnership with a number of professional businesses including accountancy firms who engage with their clients on business protection insurance. To discuss in more detail how we can help your small business clients, please contact me on 07714980112 or email tomconner@drewberryinsurance.co.uk.
Tom Conner
Director at Drewberry
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