TT165: Group Life Insurance Policy

July 23, 2011

You may be missing out on an opportunity to obtain cheap life insurance for you and your family, as well as providing a valued benefit to your key staff.

There is a little known opportunity in the tax legislation which allows an employer to take out a group life insurance policy on the lives of its employees or appointed employees (including shareholding directors).

There has been a change in the legislation to allow smaller companies to also benefit from this arrangement. Please note that members of a Limited Liability Partnership (“LLP”) or a sole trader will not qualify for the policy as they are not employees.

However, the policy may be provided through a management company who is also a member of a LLP or partnership.

The main advantages of the group life insurance policy are as follows:

  • The policy may not only include life cover but also terminal illness cover.
  • The premiums payable under the policy will be allowable for corporation and income tax purposes.
  • It is generally accepted that the amount of the premiums paid under the policy do not form part of the taxable pay of the employee for income tax or for National Insurance Contributions. This is because the premiums that the employer is paying are in respect of a number of individuals and not specifically in respect of any one individual.
  • Upon the death or on a claim for terminal illness of the employee, the benefits from the policy will not be subject to income tax.
  • If a discretionary trust is set up at the same time as the employee joins the group life policy, an inheritance tax saving will also arise as the proceeds from the policy will not form part of the estate of the employee. The beneficiaries of the trust may be specified in the trust deed or an accompanying letter of wishes. You should be aware that following the death of the employee if the value of the trust is more than the nil rate band (currently £325,000) there will be an exit charge when monies leave the trust. This represents a significant tool for estate planning.
  • The amount of premiums themselves is not generally as high as if an individual took out a life policy with the same amount of cover.
  • The amount of the available life cover can be generous as the maximum life cover can be as much as fifteen times the salary of the employee inclusive of benefits in kind.

If you think that you have insufficient life cover to protect your family then this may be a very inexpensive way to top up your life cover requirements.

If you think you or your employees could benefit from this group life policy then please contact your Barnes Roffe Partner who will be happy to talk through the tax advantages and also, should you require it, to introduce you to an independent financial adviser who will be happy to discuss your investment needs.

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