John Davies is employed as a Managing Director of a manufacturing business in Cardiff. John leads a healthy lifestyle and does plenty of exercise, but worries that someday he may not be around to support his wife, Caroline. The company takes out a Relevant Life Plan, setting his cover at £1 million. John nominates Caroline as a beneficiary.
If the worst does happen and John dies during the term of the policy, the Relevant Life Plan trustees would receive £1 million. This could then be paid, tax free to Caroline, giving her enough money to pay off the mortgage on the family home and hopefully live comfortably for years to come.
The flow chart below shows how it works:
The importance of Trusts
All Relevant Life Plans must be written in Trust. This is one way of helping to ensure that the policy proceeds are paid to those who you want to receive the money and without unnecessary delays.
- Beneficiaries can receive the money at the right time tax efficiently
- Probate is avoided.
- Intestacy law is avoided
- Inheritance Tax (IHT) liability can be avoided/reduced
Example:
Andrew Dukes is Managing Director of a furniture design business in London. He already has a Life Insurance policy but with him and his wife about to have their third child, he wants to increase his cover to help make sure his family would be financially secure if he dies. His existing plan doesn't allow him to increase his cover, so he decides to take out more cover with a new Life Insurance policy.
Andrew's Protection Adviser at Vita presents two options to highlight the differences and he doesn't hesitate to choose the Relevant Life Plan. You can see the sums below that made his decision easy.
The Relevant Life Plan is particularly beneficial for Andrew because he's employed as a salaried director and is also a shareholder of the business, so all of the savings go to him. If he were to pay for his Life Insurance personally it would cost £1,570 every year. By his company using a Relevant Life Plan to provide cover, it only costs £800 each year. That's a saving of almost 50%.
There are lots of good reasons to choose a Relevant Life Plan. But it all boils down to tax-efficient Life Insurance for directors and employees, and what business doesn't want that?
Our partners at Royal London have produced a guide all about Relevant Life Plans, which explains some of the finer detail that you or your Accountant may like to know. You're welcome to download and email the guide if you like.
Royal London RLP Guide (2016)
