Relevant Life insurance is super efficient way for industry to protect the owners directors and key employees of the business with Life insurance.
This is typically a 38% saving over domestic life insurance due to the efficient way its created as a life insurance protection(s)
What is the rule?
As standard, insurers will allow a multiple of an employees (or employed director/partners) remuneration as the maximum sum assured.
The remuneration that is generally acceptable includes PAYE and Dividend. Rental income, income from other sources and loan repayment schemes should not be included.
NB. If there is no PAYE or P11D benefit, then the person is not deemed an employee, and shouldn't have a Relevant Life cover!
The multiple allowed is based on the Life Assureds age at time of application. These multiples are noted on the fact find.
For example:
Mr (42) earns £12,500 PAYE and £37,500 Dividend. £50,000 in total.
With Aegon he could have
£50,000 X 25 = £1,250,000 Relevant life cover.
With Aviva he could have
£50,000 x 21 = £1,050,000 Relevant life cover.
And so forth.
As the rule applies at inception, including Indexation is still good practice.
Why does the multiple rule exist?
This rule has its roots in the days of Registered Death in Service schemes that were attached to pensions. By restricting the amount of cover based on the employees contribution (and not excessive to income), the understanding was that the cover would meet the 'Wholly and Exclusively' rules for allowing tax relief. Remember, Relevant Life cover is essentially an Employee Benefit, so this rule set applies.
EXCEPTION ALERT.
Generally, the insurers will ignore this multiple rule if the Sum Assured is below their financial underwriting limits. This means sum assureds below £1,000,000 are normally ok. The exception to this is L&G. At underwriting stage, L&G ask for the salary and apply the multiple. This is why we often see them restricting the cover (and annoyingly not telling us until the terms have been applied).
Why do most insurers ignore the multiple rule if the sum assured is below £1,000,000?
In short, its in their interest to do so. Their justification, and the one that I agree with is that cover under £1,000,000 is justifiable as HMRC don't see as excessive income.
Golden Rock Solutions can help you find the protection partner so the limited company can pay and protect (without any P11D / benefit in kind). Our advice is Free of charge, Confidential, Independent and saleable
