Making your life assurance cheaper
Mike Hughes explains why you should consider having life cover insurance through your practice.
So you incorporated the practice and have settled into a regime of taking personal income through salary, bonus and dividend, but have you considered some of the other advantages that an incorporated business structure brings? The one on which I am concentrating here is that of life assurance and critical illness benefit.
In my experience, the majority of practitioners are still covering the cost of such insurances from personal income, which has been heavily taxed. So would it therefore not be a good idea to consider rewriting the insurance, such that is it legitimately paid for by the business? After all, we all know that business executives generally have advantageous benefit packages, so why should you not be amongst their number?
Relevant life cover is a tax-efficient life insurance policy, allowing companies to offer a death-in-service benefit to its employees (including salaried directors). It’s set up by the company and pays out a tax-free lump sum on the death (or diagnosis of a terminal illness) of the person insured. The proceeds go directly to nominated individuals, (such as the employee’s family or financial dependants) or to a nominated charity.
Whereas the most common application for this type of insurance is to protect in the event of death by payment of a tax-free lump sum benefit, there is at least one provider in the market place that is also offering a critical illness option and given the cost of providing such cover personally it is not difficult to see how beneficial this would be.
All relevant life policies must be written into a discretionary trust. Unlike most other types of trust, discretionary trusts offer flexibility if a new discretionary beneficiary needs to be added at any point. If circumstances change it can be altered by the trustees to make sure it’s still effective.
When a discretionary trust is set up, the employee will name all the people that may want to benefit from it in the future. This can be specific people or groups (such as children or grandchildren). The employee can use a nomination form to specify how they’d like the assets to be split. However, the trustees can decide if they want to follow these instructions or not.
Please note that this cover is not available to sole traders or unincorporated partners.
There are no hard and fast rules as to how much benefit can be provided by a relevant life plan, but generally speaking the benefits have to be reasonable in relation to the overall benefit package of the individual but can take into account other financial liabilities such as for example mortgage debt.
The maximum age to which cover can be written is 75. Many policies offer an assignment clause meaning that in the event the individual leaves or sells the business, the policy can be continued individually. So ask yourself, is it time to review those protection insurance needs and to potentially save some money?