As part of my service to clients, I try and check out, periodically, that the client has strategies for:
- Retirement income
- Critical illness cover
- Life cover
- Income replacement
It is nice to have all bases covered but sometimes one has to prioritise, especially where protection is concerned and make sure that the greatest risk is covered.
This often means downgrading pension planning in earlier years and focussing on mortgage re-payment with protection in respect of the latter.
An important area is life cover, particularly for a business person with a young family and mortgage commitments.
Having your own limited company offers a tax efficient solution. This is namely an opportunity to take out a “relevant life policy” rather than a traditional “term life policy”.
The relevant life policy would offer the following advantages:
- It provides a lump sum should the owner manager die within the terms of the plan
- The premiums qualify for corporation tax relief
- The premiums are not a taxable benefit in kind
- The lump sum payable to dependents is written in Trust and hence not liability to IHT
- The sum assured will not form part of the owner manager’s pension lifetime allowances, thus avoiding a potential tax charge on beneficiaries
- The policy can pay out earlier in the event of the diagnosis of a terminal illness with life expectancy reduced to less than 12 months.
A traditional life policy will not be able to receive the tax relief and hence can be more expensive.
Of course there are conditions with a relevant life policy. The death benefit payable on a relevant life policy must be reasonable compared with the owner manager’s reward taken from their company.
That might be 4% or 5% of the sum assured, hardly a show stopper.
The premiums start out at discounted rate and will therefore increase over the term. On the other hand, if one’s life expectancy increases because of lifestyle changes, a reduction could be possible.
There are various forms to complete, including the Trust deeds. Advice might therefore be needed if there is a capital pay out which is then retained in Trust.
Relevant life policies can tick a lot of boxes but not many people (to para phrase Sir Michael Caine) know about them.
They can be the ideal product for the right person but they will not be everyone’s cup of tea, possibly because of the uplift in premiums which should be identified at the outset.
Careful advice from an Independent Financial Adviser (IFA) is absolutely essential. Someone like me is likely to be involved in advising on the tax issues. I may not advise on the produce itself. A solicitor is also likely to be needed to advise in respect of the Trust (if the proceeds are retained within the Trust wrapper).
I would have thought it was absolutely worth looking at a relevant life policy, if you are a business owner, but with exposure to a personal mortgage and other debts, and you have dependents.
Sarah Harragan of Grangewood Financial Services recently set up a very tax efficient arrangement for one of my clients. Rick Pattmore of Optimum Financial Services has also advised a client in respect of this policy.
Posted by Paul Short
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.