Life assurance, critical illness and income protection
Dying, becoming seriously ill or not being able to work as a result of illness or injury often brings severe financial consequences that can affect both an employee and their dependants. When such an unforeseen and unfortunate event happens, although having life assurance, critical illness or income protection cover won’t remedy the situation it may help offset some of the consequences by providing a financial lifeline. It’s a level of security appreciated by any and every employee.
Life assurance, critical illness and income protection are insurance policies: there are no tangible benefits – apart from those resulting from the knowledge that cover is provided as an employee benefit – until something happens that causes a claim to be made.
Insurance or assurance?
This is a common question to which there are several answers, however, the easiest to understand is that ‘insurance’ compensates by paying out for actual losses, whereas ‘assurance’ provides a predetermined benefit irrespective of the losses incurred.
Life assurance (death-in-service benefit)
The purpose of life assurance is to make financial provision for an employee’s dependants should the employee die while in your employment; the policy generally pays a one-off sum of money to a beneficiary, or beneficiaries, named by the employee. Often called a ‘death-in-service’ benefit, death does not need to happen while the person is at work or as a result of their performing it: they only have to be employed by you at the time of their death.
Life assurance policies generally make a single payment and this is usually a multiple of the employee’s salary; the higher the multiple, the greater the premium. It’s also possible for cover to include a death-in-service pension: a regular, monthly payment made to the surviving spouse or dependants.
Your providing life assurance cover for your employees is not seen as a taxable benefit by HMRC so your employees’ personal tax allowance is not affected, however, payments from a death-in-service pension are treated as taxable income.
Relevant Life Cover
Relevant life cover is a relatively little-known life assurance policy that took advantage of pension legislation that came into effect on ‘A Day’, 6 April 2006. Aimed at providing a tax-efficient life assurance policy for company directors or high-earning employees, it allows companies to offer a death-in-service benefit on an individual basis.
Although similar to other types of life assurance cover, relevant life policies are highly tax efficient: the benefit is tax free, there’s no P11D Benefit in Kind for the employee and the premium is an allowable business expense. There are several variables when it comes to working out any potential tax saving – for example the premium paid, your age, the tax rate that applies and whether you make PAYE or dividend payments – which makes it difficult to give a precise figure, but savings of up to 50% are possible. In addition, the benefit received from a relevant life policy is not ‘tested’ against the policyholder’s pension lifetime allowance which makes it the preferable, ‘policy of choice’, for high-earners.
Relevant life policies are often portable allowing the insured person to take their policy with them if they change jobs; if they do so they can either continue to pay the premiums themselves or ask their new employer to take over payment as part of their new employee benefits’ package.
Relevant life cover plans are not widely available and can only be taken out by businesses where there is an employer-employee relationship; they’re not available for sole traders or equity partners in either a partnership or limited liability partnership.
Critical illness cover pays a tax-free lump sum to an employee in the event they are diagnosed with a specific illness. It’s usual for critical illness policies to be very specific about which illnesses qualify and also their severity – the ‘spirit’ of critical illness cover is to compensate the person for any financial consequences caused by the illness, not just for having the illness. Once paid, there is no restriction on how the money can be used.
Providing your employees with critical illness cover is seen as a taxable benefit by HMRC which means their personal tax allowance will be affected, however the benefit, which is paid directly to the employee, is tax-free.
Income protection pays part of an employee’s wages or salary if they are unable to work due to a serious illness or injury – it is not intended to compensate an employee for ‘having a few days off’ because they feel unwell. The policy will usually have a deferment period that stipulates a minimum period of time off-work before a claim can be made, and payment is invariably dependent on the employee having regular medical reviews to confirm both their condition and their continual inability to work.
Payment is made to the employee via you, their employer; you then become responsible for paying your employee via your PAYE system.
Although your providing income protection is not seen as a taxable benefit by HMRC, the benefit the employee receives is considered taxable income which means you, as their employer, are responsible for deducting income tax and National Insurance.
As straightforward insurance products, life assurance, critical illness and income protection policies are easy for an employer to procure and, conveniently, an annual premium will usually provide ‘group cover’ for an organisation’s entire workforce.
As with most insurance products, the premium you pay is dependent on the level of cover you choose: there will be flexibility in many of the policy’s key considerations, for example, the type and severity of cancer, the severity of a heart attack, the level of disability caused by a stroke, the size of the benefit paid and the length of any deferment period.
In addition to the product itself, a variety of ‘optional extras’ will usually be offered, including death-in-service pensions, bereavement counselling, help with probate, extending critical illness cover to include spouses and dependants and providing legal aid counselling.
How can One Financial Solutions help you?
As a firm of independent financial advisers we can provide you with impartial advice to help you design and create an employee benefits’ package with a competitive edge; one that can make a real difference both to who you recruit and who you retain.
We’ll help you plan an appropriate strategy, recommend the best products from across the whole of the financial services’ market and help build and develop the package you need. If you already have an employee benefits’ package, we’ll review it and recommend changes we think could turn it into something hard to refuse. We can provide an annual review to ensure your employee benefits’ package remains fresh and competitive, grows in value as your employees’ careers develop and stays within your budget.
So, if you’re looking for help with any aspect of your employee benefits’ package, please call us on 020 3714 9565 or ask us to call you by sending an email to firstname.lastname@example.org.