‘Life Policy : Can Critical Illness Cover Be Put On Expenses’? (author: David Carter)
1st February 2017
You may already have heard of Relevant Life Policies, although I am always surprised by how many people have not, including many accountants. In a nutshell, these are term assurance policies that can be paid for by an employer, for and on behalf of an employee. The premiums are a fully tax deductible business expense and are not considered a taxable ‘Benefit in Kind’ to the employee.
Relevant Life Policies have been very popular with the self-employed that trade through their own limited company, as apart from the premiums being tax deductible for business purposes, the gross income required to fund a personal payment needs to be factored in, as this is where the biggest savings come from.
In broad terms the true net savings can easily amount to around 50% on a ‘net to net cost’ basis, as the example below demonstrates:
Until now, these policies have only been available on a Life Cover only basis. So no bells, or whistles and certainly no Critical Illness Benefit could be included – according to perceived wisdom.
Aviva have now changed all this, with the launch of a Life and Critical Illness version of this type of policy and it has certainly caused quite a stir within this sector. If Aviva correct, it could very quickly become a game changer within the protection market as a whole. This is because the true net savings on premium payments for a Relevant Life Policy, has a far more significant impact when Critical Illness Cover is included, since it is a much higher cost form of protection.
This short video by My Key Finance Ltd. provides a really simple explanation of the tax benefits these policies enjoy and how the savings are made:
The fact is, many providers already include Terminal Illness benefit within their Relevant Life Plan’s; a benefit that accelerates a claim being settled in full, in the event of the life assured being diagnosed with a terminal illness. So arguably, the part of the act upon which Aviva are relying on to underpin their Critical Illness benefit, is already being utilised by the same providers who are openly critical of Aviva’s interpretation of the legislation.
Whether it is a case of sour grapes or genuine concern, reaction to this is very mixed. Alan Lakey, director of CIExpert – a Critical Illness comparison tool available to intermediaries – reacted very favourably to this initiative and said:
"As an industry we continually cry out for innovation and amongst the glut of annual changes very few insurers prove to be truly inventive. Relevant Life with critical illness is a breakthrough. Previously, a number of insurers had investigated the potential for such a plan but had been unable to navigate the onerous requirements of legislation. Aviva's legal advisers have succeeded where others failed and this plan is capable of creating a whole new target audience for critical illness."
On the other hand, an L&G spokeswoman says:
“The addition of critical illness conflicts with our current interpretation, and that of the market, of the Government legislation with regard to what is allowed within a relevant life plan. We are currently re-examining the legislation and will be raising the issue with the HMRC to get further clarity on the situation.”
This could of course be nothing more than professional jealousy as these two institutions are well established rivals.
Ian Smart of Royal London commented:
“We are looking at this closely to form our own opinion as to whether this is actually possible but have concerns that this could prompt HMRC to think again about whether the legislation around relevant life policies is working as originally intended.”
Ironically, it was Bright Grey, a Royal London subsidiary, that originally introduced the ‘Life Only’ Relevant Life Policy into the market place and at that time provoked a similar reaction. They were initially introduced into the large corporate market as an addition that could run alongside Group Life plan’s. This was to benefit the higher earners within a company, as unlike Group Life cover, the sum assured is not added to the member’s ‘Pension Lifetime Allowance’ in the event of death before retirement.
Bright Grey then made the decision to launch these policies into the smaller corporate sector in 2010, whilst the rest of the industry simply watched and waited to see if HMRC or the Chancellor would bring them to an early grave, indeed many of them predicted at the time that HMRC would close it down or the ‘loophole’ within the legislation that has enabled these policies to exist, would be removed. This did not happen and over time more providers joined the fray. At the time of writing there are now eight providers offering a ‘Life only' version of Relevant Life.
A spokeswoman for Aviva has said:
“Relevant life insurance is complex, but under the current tax legislation these plans can include critical illness benefit, it is the same legislation that lets providers include a terminal illness benefit.”
And this is true, although the specific legislation that these policies rely upon does not overtly state that health related benefits can be included, it does not exclude them either and in fact leaves it open to interpretation, hence the debate! HMRC are remaining silent on the issue, so we will all have to see how this plays out.
Personally, I agree with Alan Lakey of CI Expert’s stance, when he said:
“This highlights how any form of legislation can be interpreted differently but what I find most troubling is that society as a whole would benefit by more people being insured, whether for life, or critical illness or other protection. It takes the weight off the NHS, less people apply for means-tested benefits.While HM Revenue & Customs may be very clever at counting the cost to them they need to look at the costs to society. There is a trade-off: there would be less people unemployed because employers would be able to keep the business afloat.”
Let us hope the government and HMRC agree with this logic and see the value of encouraging more people to adequately protect themselves and so avoid becoming a financial burden to themselves, their families and/or society as a whole. I am sure it will not be long before the other Relevant Life providers revamp and relaunch their own products.
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