For financial adviser use only. Relevant Life Cover. Adviser guide

Transcription

1 For financial adviser use only Relevant Life Cover Adviser guide

2 What is Relevant Life Cover? This is a tax-efficient way for small businesses to provide death-in-service benefits for their employees and high earning individuals (including salaried directors). The cover pays out a tax-free lump sum on death (or upon diagnosis of a terminal illness) of the person insured. Unlike a group scheme, the life cover is arranged on an individual basis with the employer as the policy owner, and the employee as the person insured. Premiums are paid by the employer, and are usually treated by HM Revenue & Customs as a business expense. Plus, the premiums and lump sum paid out on death won t count towards the employee s annual or lifetime pension allowances. Who might want to take out Relevant Life Cover? Small businesses with less than five employees, who don t qualify for a group life scheme. Relevant Life Cover is written on a single life basis, which allows smaller businesses to provide insurance to their most valued employees and without the costs associated with a group life scheme. High-earning employees who may exceed their personal pension lifetime allowance. Registered group life schemes are included in pension legislation; this means that any lump sum benefits paid upon death are added to the employee s pension funds and may cause the employee to exceed their maximum pension lifetime allowance. Any amount paid out as Relevant Life Cover would not count towards the employee s lifetime allowance, as this type of policy isn t considered as a registered group scheme. Members of group life schemes who want to top up their benefits. Some group life schemes are very restrictive. Relevant Life Cover can be used to provide an additional benefit in a tax-efficient way. For high earning employees: The maximum lifetime allowance an individual can accumulate during their lifetime is 1.25m during the 2015/2016 tax year. Anything over this limit is subject to tax at 55%. Some high earners may have protected the amount in excess of the lifetime allowance limit to avoid the charge. But this could mean that they can t make any further contributions to their pension (this includes becoming a member of a registered death-in-service scheme). Relevant Life Cover could be an alternative way to provide life cover for employees without affecting their protected lifetime allowance limit. 2

3 What makes Relevant Life Cover cost effective? Relevant Life Cover offers a tax-efficient way for an employer to provide death benefits for employees. And there are a number of tax advantages over a typical life insurance policy. How does it work? Employer insures employee Relevant Life Cover into trust Employee dies, or is diagnosed with terminal illness Claim paid to trustees Trustees pay out to beneficiaries HM Revenue & Customs (HMRC) usually treat the premiums as an allowable business expense, as long as the local Inspector of Taxes is satisfied they qualify under the wholly and exclusively rules. This means all premiums and benefits paid will usually qualify for relief on: Income tax Capital gains tax Corporation tax, and National insurance. When you take into account these potential cost savings, the price of the insurance is significantly reduced, when compared to the cost of a typical equivalent life insurance policy. How do the figures stack up? The following example aims to show the potential saving on Relevant Life Cover compared to an employee paying for their own life cover from their net pay. For example; a 38 year old non-smoking account manager, 360,000 amount of cover, 27 year term, level cover, earning 42,000 a year. The example shows that it s almost less than half the price for a small business to insure their employees using Relevant Life Cover, compared against the cost of a typical life insurance policy paid for by the employee. Total annual premium* Employee NI contribution (2%) Non-relevant Life Cover Relevant Life Cover N/A Income Tax (40%) N/A Employer NI contribution (13.8%) N/A Total gross cost Less Corporation Tax (20%) Total cost Annual saving (or 49%) *Correct as at March Monthly premium for LV= Flexible Protection Plan Online Level life insurance Relevant Life Cover Adviser guide 3

4 Relevant Life Cover from LV= How much cover can your clients have? There is no minimum amount of cover (only a minimum premium of 5 a month). The maximum amount of cover available is 10 million. However, should your clients want cover of more than 1 million; we may ask them to complete a financial questionnaire (available to download at LV.com/adviser). What is the cover? Your client can select: the amount of cover the term, and whether cover is level or inflation-linked. Many employers choose to set the amount of cover for their Relevant Life Cover as a multiple of salary, in the same way as a group death-in-service scheme. We suggest that you recommend your clients select an amount of cover based on age and yearly earnings when the cover starts, subject to the following maximum limits: How to apply? To make it even easier for you, we offer a range of application routes. Paper application: the paper application form has been designed specifically for Relevant Life Cover and can be downloaded from our website, or requested from LV= directly. Online: You can apply for Relevant Life Cover through our online quote and apply system. Select the benefit required via a drop down - Relevant Life Cover is one of the options. Once you have selected Relevant Life Cover you can choose how you wish to apply, either through our express route (data collection via tele-underwriting) or fully online through the interactive underwriting system years old Up to 25 X remuneration years old Up to 20 X remuneration years old Up to 15 X remuneration years old Up to 10 X remuneration If the amount of cover your clients choose isn t within the limits set out above, please let us know. The amount of cover available, and the limits that apply, are explained in the Relevant Life Cover Policy Summary. How to get a quote? You can quote for Relevant Life Cover on the portals, by selecting Flexible Protection Plan (FPP); via the online quote and apply system on LV.com/adviser or by calling us. 4

5 Why choose us We re the UK s largest friendly society and a leading financial mutual with over 5 million customers and members*. We ve been designing protection products since 1843 and consistently seek out ways to deliver value to our members, as well as the advisers we do business with. Our aim is to offer financial security and peace of mind, through quality protection which pays out when it matters. Benefits for employers with the LV= Executive Assistance Plan Your clients can offer their staff a fantastic employee benefits programme through the LV= Executive Assistance Plan. This service is available 24 hours a day, seven days a week and can provide advice and counselling on personal and work-related issues, including health, wellbeing and legal matters. The LV= Executive Assistance Plan can be used as soon as the policy starts, and specifically at claim, can provide invaluable support: Bereavement counselling if the person covered has passed away and left grieving loved ones behind. The counselling will be completely free and can provide practical and emotional support. If the person covered has been diagnosed with a terminal illness, the service can be used to access healthcare advice from a team of qualified nurses and practitioners. Companies can spend thousands of pounds on this type of employee benefit programme, but with LV= your client can offer their employees this service at no additional cost to the business. *as at December 2014 Relevant Life Cover Adviser guide 5

6 Benefits to you Pre-sales and underwriting support Relevant Life Cover is processed by a specialist team, which means you and your clients will benefit from: A fair, considerate and straightforward approach, which means less work for you and a faster and more efficient application process for your clients. Flexible medical examination arrangements. If your client needs a medical examination, where possible we ll make sure they re seen by their local GP, and if appropriate, offer a suitable alternative with our nationwide healthcare networks. All cases you send to us are important, but we understand some applications require specialist support. So we ll offer you a dedicated team for larger cases ( 1,000,000 of cover or above), which includes designated administrators and senior underwriters, who will deal with your case from pre-submission to policy completion. Our Relevant Life Cover experts will be on hand to answer any questions you might have, right from the start, ensuring the process is as simple as possible for you. We aim to review all medical evidence on the day we receive it (or within 24 hours) and will underwrite your clients application on each piece of evidence when it arrives. 6

7 Example for a high earner Fred Bands is employed as a managing director of a property development company in Bournemouth and has 1m saved in his pension pot. Fred is 44 and married to Summer, together they have three young children. Fred is very active, still playing 5-a-side football and enjoying running around looking after his children. Cover: 800,000 Property development company pays a monthly premium for the term of the plan Fred dies during the term of the plan The trustees make a successful claim on his LV= Relevant Life Cover The trustees pay Summer 800,000 tax free The lump sum doesn t count towards Fred s pension pot, so his lifetime allowance is still below the limit Whilst Fred is healthy, he worries about what would happen to Summer and the children financially if something were to happen to him. Fred speaks to his financial adviser about his concerns and his adviser recommends his company takes out LV= Relevant Life Cover with a 800,000 amount of cover, and then writing in trust, nominating Summer as a beneficiary. So, if the worst did happen and Fred died (or was diagnosed with a terminal illness) during the term, the trustees of his Relevant Life Cover would receive 800,000. This could then be paid, tax-free to Summer, giving her enough money to pay off the remaining mortgage on the family home and hopefully live free from financial worry. And although Fred has a substantial pension pot of 1million, the 800,000 payment wouldn t count towards his personal allowance. This means his family could receive all the money they were entitled to, without any excess taxed at 55%. For more information on trusts and how they work specifically with Relevant Life Cover, turn to page 9 Relevant Life Cover Adviser guide 7

8 Example for a small business Amanda Mair is a partner of a small veterinary practice (an LLP) just outside of Birmingham. Amanda is also an employee of the practice working full time, and employs two members of staff Emma, another experienced small animal vet, and Leo who is a newly qualified equine vet. Amanda is proud of the practise she s built and values the roles that Emma and Leo have played. It s a job which carries risks; Amanda feels that she should provide life cover for herself and her business employees. Amanda speaks to her financial adviser who advises against setting up a group life scheme due to the administration costs involved, but suggests she considers LV= Relevant Life Cover, which would be a more affordable alternative. This is how the costs would work, assuming that the premiums qualify as an allowable business expense. Amanda Emma Leo Monthly premium Employee National Insurance Contribution N/A N/A N/A Income Tax N/A N/A N/A Total company gross cost Less Corporation Tax (assuming 20%) Tax-adjusted total premium These figures are for illustrative purposes only. Tax calculations are based on 2015/2016 tax rules and may change in the future. The information assumes that the same rate of Income Tax/ National Insurance applies to the whole of the premium. It may be affected by individual circumstances. 8

9 Trusts A trust is a legal arrangement set up by a person, a group of people or a company, to look after something (such as a life insurance plan, a property or an investment) until the time when the contents of the trust are given to someone else. A trust owns whatever is put in it and looks after the contents until they are due to be given out. Why people generally set up a trust Usually, someone sets up a trust to make sure that the trust assets: are paid to the right person can be paid out quickly, and are paid tax-efficiently (the contents of the trust aren t normally included in the estate of the person making the gift, which means that inheritance tax won t apply on their death). To set up a trust for Relevant Life Cover, four groups of people are needed: 1. The principle employer is the employer who sets up the trust and puts the Relevant Life Cover into it. Once it s placed into trust the principle employer no longer owns it, it is instead owned by the trustees. The principle employer will be a trustee, and there should be at least two other trustees too. 2. The member is the employee whose life is to be insured. 3. The trustees are the people responsible for looking after the contents of the trust for the person or people who will eventually get them. The trustees ensure that the contents are given out, taking into account the member s wishes. 4. The beneficiaries will receive the contents of the trust. One or more beneficiaries can be chosen. It may be possible for the trustees to change the beneficiary, but this depends on the type of trust. The principle employer can never be a beneficiary, but the member and the trustees can. Relevant Life Cover Adviser guide 9

10 How trusts work for Relevant Life Cover What type of trust is needed for Relevant Life Cover A discretionary trust should be set up for the plan, as it will name all the people who may want to benefit from a future Relevant Life Cover payment. This could be groups of people, such as children or grandchildren, or specific individuals, and are known as the discretionary beneficiaries. We ve produced a discretionary trust guide which explains step-by-step how to complete the trust deed. You can download the guide, as well as the trust form at lv.com/literature Will inheritance tax apply to this Discretionary Trust? The lump sum paid out on death will not be included in the member s estate for inheritance tax planning purposes. However, there are some situations in which there could be some inheritance tax to pay on the assets held in trust. A periodic charge may apply on each 10th anniversary from the date the trust is created. An exit charge may apply when anything is paid out from the trust. These charges are based on the value of the trust assets at the time. They re unlikely to apply unless the lump sum paid out on death is held within the trust rather than being distributed straight away. Is there any inheritance tax to pay if a beneficiary dies? No, as the trust assets aren t legally owned by any of the beneficiaries. So if money hasn t been paid out from the trust, it won t be included in any beneficiary s estate when they die. Can this Discretionary Trust be used in Scotland? Yes: Scots law will apply to this trust if the address of the principle employer is in Scotland when the trust is created. 10

11 Frequently Asked Questions How long can this cover last? For life cover to qualify as Relevant Life Cover, it must end before the person insured reaches their 75th birthday (70th birthday for inflation-linked cover). Who is eligible for Relevant Life Cover? Any employee of a business is eligible for Relevant Life Cover. This includes directors paid via PAYE. The following types of business are not eligible for Relevant Life Cover: Sole traders (unless there are employees of the business other than the sole proprietor who will be insured by the sole trader) Partnerships (except for Limited Liability Partnerships) Equity members of a Limited Liability Partnership What are the requirements? To qualify as Relevant Life Cover, a life cover policy must meet all of the following legislative requirements: Life insurance only (including terminal illness benefit) No waiver of premium or other add-ons (such as critical illness cover) No surrender value Single life only Cover must end before the person insured reaches age 75 Life of another (taken out by the employer on the life of the director or employee) Benefit paid out to an individual or charity (this can be via a trust) Can self-employed people have Relevant Life Cover? No, Relevant Life Cover is only available for employers to insure their employees. What happens if the person insured no longer works for the company? There are a number of options. We can either cancel their cover straight away and the trust will end. But, the policy has no cash in value at any time, so they won t get anything back and it will leave them without cover. If the individual wants to continue their cover, we can give them a new own life policy on the same terms as the existing contract, without the need for further underwriting. But, the individual will need to pay all outstanding premiums from the date the existing plan ended. The new policy will not be set up as Relevant Life Cover, and will not offer the same tax advantages. Alternatively, if the individual s new employer wishes to continue their cover on their behalf, we can issue a new life of another policy on their life, on the same terms as the existing policy, without the need for further underwriting. The new employer will need to set up a Relevant Life Cover trust and will be responsible for paying all future premiums from the date the existing plan ends. The new policy will qualify as Relevant Life Cover. If the individual wants to do this, they ll need to let us know within 30 days of leaving employment. How is Relevant Life Cover set out in legislation? We ve included extracts from the relevant legislation (subsection 393B (4) of the Income Tax (Earnings and Pensions) Act 2003 ( ITEPA ) in the policy summary, which explains why the tax savings are possible. The main purpose of the policy cannot be tax avoidance Does cover have to be offered to all employees? No. Cover is set up on an individual basis, including for new employees who join the company at a later date. It s not a group scheme and employers can choose who to offer this to (as long as they re eligible). Relevant Life Cover Adviser guide 11

12 Protection Income Protection Critical Illness Life Unemployment Liverpool Victoria Friendly Society Limited: County Gates, Bournemouth BH1 2NF LV= and Liverpool Victoria are registered trademarks of Liverpool Victoria Friendly Society Limited (LVFS) and LV= and LV= Liverpool Victoria are trading styles of the Liverpool Victoria group of companies. LVFS is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, register number Registered address: County Gates, Bournemouth BH1 2NF. Tel: /15