How to reduce the cost of life cover by up to 47%
Published ¤ 07/03/2011 15:07:58
Here we look at how a "relevant life policy" can help to reduce the cost of life cover by up to 47%.
Most people would want to ensure that their dependants and loved ones were financlially protected should the worst happen. Two common methods of providing this protection with life cover are; by paying for it personally out of taxed income, or through a death-in-service scheme funded by an employer.
Another option would be to use a Relevant Life Policy, which could provide the cover in a much more tax-efficient manner.
Paul Skinner from PKS, Odiham based mortgage and insurance broker
Paul Skinner of PKS explains why a relevant life policy might be a more cost effective option.
"Relevant life policies are set up on a sinlge life basis, paid for by an employer, on the life of an employee or director (as long as they are paying tax under PAYE). Many group "death-in-service" schemes require a minimum number of members, however, there are no such minimums with a RLP, making them ideal for small businesses.
"Many high earners can now find that their death-in-service benefits would take their pension fund above the lifetime allowance threshold (£1.8M for 2010/11), and a tax charge of 55% could be applied to any excess. However, payments from, and indeed premiums into, a relevant life policy do not count towards an individuals annual or lifetime allowance, making them particularly attractive to higher earners.
"Relevant life policies are also an allowable expense for businesses (subject to the "wholly and exclusively rules"), but are not treated as a benefit in kind. Hence there is no national insurance liability for either the employer or employee, and no income tax liability for the employee, either on the premiums, or the benefits when they are paid out. So these types of plans are becoming more and more popular with all types of businesses.
Mr Smith is a director of ABC Ltd. He currently pays £200 per month for his personal life cover, out of his taxed income. Mr Smith is a 40% tax payer, and pays the additional 1% rate for national insurance. ABC Ltd pay national insurance at the rate of 12.8%, and corporation tax at 21%. At pressent Mr Smith needs to earn £338.98 gross to pay his premiums. ABC Ltd have to pay £43.39 NI contributions on this amount, although these and the salary are allowable deductions, giving a total cost to ABC Ltd of £302.07. If ABC were to take out a relevant life policy on the life of Mr Smith, the premiums would be the same, £200 per month, however, there would be NO income tax or national insurance to pay, and the premiums would still be an allowable expense. Thus the total cost to ABC Ltd would be £158, a saving of over £144 or 47%."
If you would like more information on how a relevant life policy might benefit you or one of your employees, then call PKS on the number at the top of the page.
Click here to compare the cost of life insurance.
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