Image by Tyler Nix

A brief guide to

INCOME PROTECTION AND RELEVANT LIFE POLICIES

Do you need income protection?

Each year around one million people in the UK find themselves unable to work due to a serious illness or injury (ABI 2017). Income protection insurance is designed to give you some cover if you can’t earn an income for those reasons. If something happened to you, would you be able to survive on savings, or on sick pay from work? If not, you’ll need some other way to keep paying the bills and you might want to consider income protection insurance.

WHAT IS INCOME PROTECTION INSURANCE?

Income protection insurance (sometimes known as permanent health insurance) is a long-term insurance policy designed to help you if you can’t work because you’re ill or injured. It ensures you continue to receive a regular income until you retire or are able to return to work.

 

  • It replaces part of your income, if you can’t work because you become ill or disabled.

  • It pays out until you can start working again or until you retire, die or the end of the policy term, whichever is sooner.

  • There’s often a waiting period before the payments start, so you generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly premiums.

  • It covers most illnesses that leave you unable to work, either in the short or long term (depending on the type of policy and its definition of incapacity).

  • You can claim as many times as you need to, while the policy lasts.

 

It should be noted that it’s not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness. It’s not the same as short-term income protection, which also pays out a monthly sum related to your income, but only for a limited period of time (normally between two and five years) and can cover fewer illnesses or situations.

HOW MUCH DOES INCOME PROTECTION COST?

How much you pay each month will depend on the policy and your circumstances. Usually, income protection insurance covers a wide range of illnesses and situations and has the potential to pay out for many years. The cost of a policy will vary based on a number of factors, including: age; job; whether you smoke or have previously smoked; the percentage of income you’d like to cover; the waiting period before the policy pays out; the range of illnesses and injuries covered; and your health (your current health, your weight, your family medical history).

 

With income protection insurance, everything depends on getting the right policy – and that’s where we come in. We can help you arrange the most suitable policy for you.

IF YOU’RE A BUSINESS OWNER YOU SHOULD CONSIDER A RELEVANT LIFE POLICY FOR YOUR DIRECTORS

A relevant life plan is a stand-alone single life policy. It’s a tax-efficient way for employers to give death-in-service benefits to their employees outside of a registered group life scheme.

Image by Glenn Carstens-Peters

WHO ARE RELEVANT LIFE POLICIES IDEAL FOR?

  1. People with high earnings and big pension funds who don’t want their death-in-service benefits to form part of their lifetime allowance.

  2. Small businesses that don’t have enough eligible employees for a group life scheme.

  3. People who are currently in a group death-in-service scheme that doesn’t allow voluntary increases or has restrictive definitions of remuneration.

  4. People in a group death-in-service scheme who don’t want their cover linked to salary.

THE ADVANTAGES OF A RELEVANT LIFE PLAN

There are lots of good reasons to choose a Relevant Life Plan, but it all comes down to providing tax efficient cover for directors. Here are some of the other reasons why it might be suitable:

 

  • The benefit won’t form part of a director’s lifetime pension allowance.

  • The premiums won’t form part of their annual allowance. So, they can still make full use of their annual allowance to contribute to a registered pension scheme.

  • The taxman doesn’t treat premiums paid by employers as a benefit in kind. This means directors don’t have to pay income tax on the premiums.

  • Nor are the premiums usually assessable for employer or employee National Insurance contributions.

  • If the taxman is satisfied the premiums qualify under the ‘wholly and exclusively’ rules, the employer can treat them as an allowable expense for corporation tax.

The benefits are paid through a discretionary trust. They’re paid free of inheritance tax because the pay-out isn’t part of the diector’s estate. But the trust will be subject to normal inheritance tax rules for discretionary trusts. Sometimes this may result in the following charges:

  • Up to 6% of the value of the trust fund on each 10th anniversary of the date the trust was set up (the periodic charge). There will only be a periodic charge if there’s a value held in the trust at the 10th anniversary. This could happen if, for example, the employee died shortly before the 10th anniversary and the benefits hadn’t been distributed to the beneficiaries.

  • Up to 6% of the value of the trust fund when it pays out to a beneficiary (the exit charge).

Under current legislation it’s possible to avoid these charges by splitting the cover into several smaller plans each written under trust on different days. By doing this each trust will have its own nil rate band. As long as each plan has an amount of cover which is less than this no charges should arise.