Why do you put relevant life cover into a business trust?
Holding your employee’s relevant life cover in a trust is an effective way of protecting the money their family or beneficiaries will receive.
There is strict legislation involved in setting up relevant life cover through a trust, so if the conditions are met the process is more streamlined and tax-efficient than standard life insurance.
Here’s a quick guide to why you set up relevant life cover in trust.
Why are relevant life plans held in trust?
Writing life cover into a nominated trust with limited beneficiaries is a legal condition of life cover plans, because it makes sure the lump sum gets paid directly to the beneficiaries without the hassles of probate or inheritance tax.
It also makes sure that employers or colleagues can’t use a trust fund for tax avoidance, because they can’t be a beneficiary unless they’re a spouse or family member.
Giving the policy over to a trust isn’t optional, but doing so has a range of benefits:
- Fast payout – no lengthy legal processes to hold up the claim
- Tax protection – the life cover plan isn’t part of the person’s estate or company assets and so won’t count for inheritance tax or income tax
- Flexibility – the discretionary trust will allow trustees to nominate multiple beneficiaries or change them as they see fit
- Control of funds – the trust can manage when money is paid out, how much, and to whom (for example, restricting access for children until they turn 18)
There are also several tax benefits for the employee and employer for the duration of premium payments:
- The life cover benefit isn’t counted as part of the employee’s annual or lifetime allowance for their pension
- Premiums aren’t counted as a benefit in kind or for National Insurance contributions, and can even be written off as a business expense in some cases
This has the potential for massive savings over the lifetime of the policy, especially compared to taxable group life insurance schemes and personal policies.
Holding life cover in an accepted trust means you’re accessing these tax benefits legally and can benefit from them for the duration of the policy.
What is relevant life cover?
Relevant life policies provide life insurance cover for the dependants of company employees or directors through a discretionary trust.
The employer takes out the life cover and pays premiums to the trust, which are tax-free payments because they aren’t classed as a ‘benefit in kind’.
The employee’s family or financial dependants will be named as the beneficiaries when the policy is drawn up, and the trust will pay a tax-free lump sum to them upon the death or critical illness of the employee.
Life cover plans are ‘non-registered schemes’ so they aren’t subject to the same tax rules as registered schemes.
There are legal limitations to life cover plans to make sure applicants actually qualify for the tax benefits, including the following:
- The policy can payout up to 15-25 times the individual’s salary/dividend income
- The maximum term is 40 years and can’t cover someone over the age of 75
- It must pay a lump sum benefit on death or terminal illness only
- The lump sum will depend on the individual’s age and earnings
- Premiums must be paid by the employer into a trust
- The trust must be nominated at the time of applying for the policy
- Beneficiaries are restricted to individuals (family and dependants) or charities
- The policy must not be set up for the purpose of tax avoidance
Life cover is written through a trust from the beginning to make sure all the legal conditions are met – you can’t set up life cover any other way.
How to set up relevant life insurance
Relevant life policies are set up as single life cover plans, covering an individual employee, with their employer paying the premiums for the duration of their employment.
The business must agree to pay the premiums and be the owner of the policy, setting the cover amount as a multiple of the employee’s annual salary.
This amount is usually dependent on the employee’s age, as the plan will end on their 75th birthday.
The employee’s medical history, occupation, and lifestyle will also affect whether an insurance provider chooses to take on the policy.
If the insurer agrees to take out the policy, they’ll help you with the documentation to set up the trust with your nominated trustees and beneficiaries.
Looking to set up relevant life cover?
Got questions about shareholder protection and relevant life insurance?
Contact Rigby Financial today to discuss how our relevant life cover plans can help you.