Kathryn Knowles  00:15

Hi, there, everyone we are on at season nine, episode three. And stay again is just me, and I’m going to be talking about relevant life insurance and how you can advise your clients on that. This is the practical protection podcast. So because we’re just gonna be doing again, every now and then I’m gonna do a feature on sorry, mini mini deep dive into some of these products, it’s not going to be a super long episode. So kind of like, Yay, we don’t have to go too much into lots of lots of boring technical jargon and everything. But there are some really key things where we need to know about relevant life cover, there is lots of debate about certain areas. And part of this today will be giving my opinion on certain areas and how I would approach things in my company. And from my advice, background from my compliance background, and what I would feel comfortable as doing those sorts of things.

So Well, obviously, it is very much a case of do what your company obviously suggests is rise to what your compliance people suggest is right, but I will just be giving some arguments for how I would approach certain things. So relevant life cover, what about life insurance, essentially, and, and it’s all about an employer and employee relationship. So that is how you can establish that somebody is eligible for whatever I’ve covered. So it might be that you have a limited company, it might just be the one person, you know, could just be the Managing Director, their own person happens to be limited company, they can still have relevant life insurance, because company directors of limited companies are still classed as employees of the company. But, you know, we do often speak to firms that are bigger than this. And it can be a lot of the time it can be the directors, it can be really beneficial way of arranging things like life insurance with somebody. And because there’s certain advantages we can have in terms of tax and the premiums and things like that. But it must be to do when we’re doing relevant life insurance. I think, again, this is something I mentioned in one of my other ones, episodes is that when we’re talking about this, it’s the company that is the clients. And it’s really, really strange because obviously speaking to the usually speaking to the Managing Director, we’re doing that company for them there.

So the the insurance for them, it is through their company, they are our client. But you know, in terms of the technical aspects of this business policy is being arranged, or the company it is relevant life insurance is a death in service benefit that has been offered by that company, to its employees. Now, a lot of the time it will be the MDS, but it could be as well that the MD isn’t wanting to give it as I can benefit or perk to one of their employees. As like, Thank you for your service, we want you to know that we care about you and your family, if something happens to you, then we would like to know, we want you to know that they are going to be financially safe. So here’s this extra perk, in a sense to working with us. Now, quite a lot of the time that would move to probably more like group life insurance, but it can happen on the relevant life insurance space. So. So what happens is you set up a life insurance policy, the policy owner is the company. And the person who is insured is obviously the person who is insured, the payments are paid for by the company, and they can be offset against corporation tax. Now, here’s a big big debate area. And I will obviously approach from the approach that I would do. And I strongly recommend that you do not do relevant life insurance to cover a personal debt. And the reason being, is that as I say, this has to be an employer employee relationship is a thank you for your service. Because when we’re doing these things, obviously, we’re getting the advantages or tax advantages on the premium. So we do have to think about HMRC at times. And, you know, it is possible that if HMRC sees the payment of a relevant life insurance policy that is specifically linked to the amount that is on a mortgage, personally, that they might turn around and say, well hang on a minute, this isn’t an employer employee relationship here. This is a personal debt. And you’ve done it through this way because he wanted to use a loophole and the tax advantages. This isn’t anything to do with your service to the company. So we need to be super super careful.

So that you know that is a potential risk that’s there, you can do it. There are some insurers that do offer decreasing term relevant life cover. And we at my company, don’t use those we don’t recommend on those. If they had a 0% decrease rates. If you did choose one of those and you put it down to a 0% decrease rate, then it could be argued that it’s going to reduce a set amount each month. And you could potentially be using it a little bit like a family income benefit to say, well, as you get closer to the person retiring, the, the financial support you want to give the family reduces over time. It’s getting quite complicated and a bit achy, you know, we want to just make sure that, you know, ideally, we just wanted to not be fafi. And as with anything life insurance in itself is really it’s really quite cheap. So, do we need to make it more complicated than it is? Probably not. But when we’re saying this about the mortgages, so let’s say I have somebody, and then mortgages to insurance 32,000 pounds over, let’s go 17 years, okay. And we’re looking at doing them life insurance, we’re chatting away to them, we established that they’re an MD of a limited company, or are in a position of influence in 1am. I thinking right, right. Okay, well, let’s have a look, go back to that basics, always back to the basics of life insurance, you know, is there a liability, right, we want to cover that, that is to assume that there isn’t a life, but even when there is one, so there isn’t a liability. So we’re not gonna be covering a personal liability with the relevant life.

So we go back to the basics of what that multiple of salary while we’re this person, five times salary is 250,000 pounds, okay, and their retirement age is about 20 years in the future, that’s what they’re aiming for. Or, you know, we might just be close to that anyway. So we could do a relevant life insurance policy of 250,000 pound over 20 years, now, that’s going to be fine. Because we’re doing a multiple of salary, it’s five years worth of thank you for your service to the company takes them to their their retirement age, or at their retirement age, which is exactly what we would want to do for relevant life insurance policy. The fact that it, if the family received that money, that 232,000 pounds of it could be used to pay off a mortgage. Well, that’s, that’s obviously like a lovely perk. But that’s not to do with the recommendation that is kind of just like that, this is the money the prime is going to be receiving. And if they want to pay off that mortgage with that money over the next 17 years, then that’s what they do. And you know, that’s, that’s absolutely fine. And so there’s nothing wrong with doing it that way. So my suggestion is, if you are in that situation, instead of having this potential, there’s definite grey area as to whether or not this is going to be employer employee relationship, and insurance that supports that particular relationship, not other things, then just simply do a multiple salary do one that makes sense.

So we usually have three to five times salary is a good guide, you can even do 10 times salary as a guide, you know, this, you can do as long as you justify it and your reasoning. And then that makes sense, you know, you might want to do 10 times salary, because I don’t know, you know, we might want to take into the fact that, you know, obviously we’re wanting to give this benefit to somebody. And, you know, we can take into the fact that as a young family, you know, it could be that the MDS themselves off one of the employees go, you know, what you’ve got a young family wants to know that you know, why your kids are so young, we want them to be able to know that they’ve got a lot of security there, which again, is absolutely fine. But it’s just that the mortgage side of things is a huge, huge debate area. And some compliance firms will be absolutely fine with it, say some insurers will do those policies. For myself, my company for the way that I trained in this area, I just suggest, instead of doing it so much the mortgage where we could end up with a not pleasant situation of you know, it possibly be the company, or the family, I’m not even sure at this stage, you know, who would need to repay those approved those taxes on the premiums HMRC that they would feel diddled out of, we don’t want to do that it’s going to be a really, really horrible situation that everyone’s facing anyway, we don’t want to be messing about with the premium side of things as well. So well, if at life policy, say owned by the company, it’s going to be interest to the benefit of the loved ones.

So the person that’s insured, we’re going to be saying, right, if something happens, we want this person to receive the money. So in terms of my relevant life insurance policy, it’s owned by Cura, I’m the person whose named as the person insured on it. And the proceeds are set to go to Alan, my husband, and vice versa. With relevant life insurance, we need to be aware of the periodic charge that can happen on these trusts. And basically what that is, is that on the exact day of the 10th anniversary, you can hear me saying a bit because it’s just so fluffy and just pointless, but it is something we have to deal with. So on the exact day of the 10th anniversary of the policy being put into trust, if there’s a claim on that exact day of the 10th anniversary, and the money’s in the trust, it could be taxed. So let’s say we put a policy in place on the first of April 2024 And then on the first of April 2034, there’s been a claim the money’s held in the trust at that point, then it’ll be taxed by HMRC, based upon current rules, for the majority of the time, it’s, it’s very, very unlikely that that is going to happen. As soon as the money’s in the trust, it’s very, very likely that families are going to take it out of there, get it away from that.

So it’s just if it stays sat in the trust, which is what we want to be very, very careful of. And obviously, that 10 is a 10 yearly things would be first of April 2034, first of April 2044, and going on and going on and going on, which is really, really rubbish. But it’s there. And it’s something that we just need to be mindful of and contend with a bit. So what’s interesting, though, was was that HMRC can potentially challenge these things. And so let’s say if somebody has died, and the money is not being put into trust in what we imagine is a reasonable time. And then HMRC, you know, and obviously HMRC looks at and goes, well, actually, no, this person died a month before the 10 year periodic charge, the money should have been in there, we think, you know, the it should have been in there, either someone’s deliberately held off or not, they’ve not been doing it well enough, but it should have been in there. So we’re going to charge as if the money was there on that, which obviously, we want to avoid, you can also have, and I’ve been made aware of a situation where HMRC have looked back and established, I think this was more in the group lifespace.

But again, with some group life insurance policies, there’s also this 10 year if periodic charge, where they looked at a terminal illness benefit or terminal illness claim. And they basically said that this person was terminally ill, yes, they did die a bit after the 10 year recharge births. They said it was foreseeable that this person was going to die. Therefore, even though they died quite a bit after the 10 year to charge the money, they saw I said them while the show was should have approved it, and the money should have been in there. So your why was that tax? And which is to be honest, that’s that’s pretty terrible have to say, obviously, don’t HMRC have to be or anything but you know, I mean, that’s, that’s pretty, pretty enough, if an insurer hasn’t approved the TI claim, because they say there’s not enough evidence, then really, there shouldn’t be an argument to say, well, you should have done it and this and that, because ultimately, no matter what that is the family obviously losing out. But however, that’s the way that some of these things work. And just bear in mind with all these trusts, we do have our nil rate band, which sets out three insurance 25,000, that wouldn’t be taxed, tax would be above this and at a rate of 6%. With relevant life insurance, we can transfer to another company.

And there are certain forms that we just need to fill in with Most insurers, I think there’s one insurer I can think of it doesn’t do it. And but most insurers, you will just fill in a form and get permissions and everything to transfer to a new company, you can also transfer to personal cover. So somebody has taken up this policy their company has wound down instead of restarting everything, again, we can just do to sign some forms change it to personal, obviously, they would then the premium would change because there will be obviously the tax and the premiums and things like that that hadn’t been there before. And and what will happen is that there was some insurers, not all of them, but some of them, they actually remove the terminal illness benefit that comes with the life insurance policy, which isn’t particularly great. And I haven’t I don’t actually know the logic behind that, which is, it’d be really interesting and ensures that listening with you, if you can let me know the logic behind removing the TI benefit, I think it must be something to do with the again, the employer employee relationship, and it changing away from that kind of structure weaving is personal or could be wrong, but I can’t see any of the reason why that would be the case.

So if you do have somebody who’s wanting to potentially wind down their business wanting to not do their relevant life insurance policy, you know, you need to discuss that you need to make them aware, just like we would do like if with any policy if we’re doing like a replacement policy declaration, we need to make sure that we are very, very clear, having it in written down to them having it verbally discussed as well to say, you know, if this terminal illness benefit is being lost, it might well be that the person says what can we just read do a new policy where I have that that might not be an issue if if isn’t if the current policy has not been set up too long ago, if there’s been no health changes or anything like that, then setting up a new policy could be absolutely fine without a huge shock premium rise. But with a lot of people that are health changes and things do do alter, we could suddenly start seeing increased premiums if even if you’ve got somebody where you set up life insurance 12 years ago, and now they want to do it there’s gonna be definitely going to be a premium jump because at 12 years older, which is you know, they’re 12 you was closer to a potential risk of dying at a younger age in a sense than what we would usually expect so. So just keep an eye on that have a look at both options and see what’s right for them.

So in terms of relevant life insurance, let’s have a quick look at relevant life insurance versus group life insurance. Both of them are death in service policy, relevant life insurance as a single person. Death in service policy group life is multiple people death and service. So key differences are I really like relevant life. I like both policies, I have to say I do really like both. Obviously, this has to do with the business and what the business is wanting to do. They both have different advantages. Relevant life insurance was brilliant about the relevant life insurance is that the premiums are fixed, on the can be fixed, obviously. And assuming that you don’t go I say fixed, I’m gonna say increasing isn’t necessarily fixed, but it is you were doing guaranteed, you know, always say I always say for life insurance do guaranteed or obviously ever possible, stay away from anything where it is any kind of changes. With the exception, obviously of RPI length, we do want to RPI link if we can. And so yeah, relevant life insurance, the premiums are the same, you set up somewhere in their 30s. It’s the same for them as when they’re in the 60s. Brilliant. And but obviously, there was medical underwriting, somebody is going to need to go through the full process, they might not have time to go through a full application process, obviously, some people are incredibly, incredibly busy. They’re not always thinking that insurance is at the top of their minds. If we then make it even longer by saying, well, you’re gonna have to sit with me and do a 30 minute 45 minute, you know, application, it can sometimes turn people off. And obviously there can be financial underwriting as well.

But that depends upon where we’re going to it’s very much how old the person is, how much coverage one, I wouldn’t really be expecting for a lot of people financial underwriting to come into play on so we’re, and so we’re starting to get over the million pound mark. But we could easily start getting into medicals and you know, some people really don’t see medicals. And that’s not to do with them being funny. You know, some of us some people just genuinely don’t want to be medicals. It’s not that they’re wanting to hide anything but could be again, they’re very, very busy. They don’t have time to do this. It’s not something it’s I don’t think it’s enjoyable for any of us to think that someone’s going to come along to our height and weight. Ask us all the questions again, that we’ve just already asked them to do the application, make them go do a urine sample, make them do a blood test and everything like that it’s medicals on philosophy, for medicals aren’t an issue but some people they can be and obviously like needlestick phobia, white coat syndrome, they are real things and people could just be like, you know, no, it’s just not for me, which is when we might potentially want to have a look at group group life insurance.

The brilliant thing about group life insurance is that it can end up being a lot cheaper per person, than if we insure people individually. So let’s say well, I want life insurance, I don’t know is going to be 50 pound for the person if we do it that base a single person relevant life insurance 50 pound a month? Well, you might find with group depending on how many people you insuring, yes, overall, the premium is going to be more than 50 pound a month, at times it can be quite low. So it depends on how many people are sharing. But in a sense, the more people you have, the cheaper it is per person. So whilst it might cost 50 pounds, if you do it for a single person, they actually the equivalent might be that they only I don’t know if they’re maybe like 20 pounds or something if they’re on a group on but obviously the more people being charged at 20 pounds overall more expensive, but per person cheaper. And the funny thing about group is that there’s none of the fact of the medical underwriting up to certain limits, would usually be able to get up to 550,000 pounds per person life insurance without any medical underwriting. So with some insurers, not all insurers, some insurers, and it’s very, very important in the group space that you do, that you if you are working, I suppose really speak to account managers, make sure that you get that technical knowledge, get in writing what’s expected in terms of medical information they do and don’t want to know, some group insurers are brilliant and very upfront and say, and you know why? We just want to know if anybody that we’re insuring has had this, this or this in the last 12 months.

And some insurers don’t ask that. But then in the background, they may want to know stuff, and then some Don’t ask anything. And they don’t want anything in the background. They’re just like, No, we’re just we’re not doing anything like that. So so there’s that there’s three different kind of approaches in the group space. Not easy to know either which way but essentially, it’s just really important to know which one is is that route and that process depending on who you’re using. So relevant. I’ve fixed premiums medical underwriting group, it’s not fixed premiums. It is annually reviewable premiums, it will get more expensive, I say will get more expensive each year it will genuinely be getting Next my expensive each year because people are probably going to be staying in the company getting older. And and as I say the benefit is there’s no medical underwriting but be conscious with group that it does gender price, I’ve forgotten how but somehow with group, they managed to get away from the gender directive thing. And so that is something to just be mindful of as well. So as an example, if you have a team of people for life insurance, and they are more, they are more many men, that will in a sense, be more expensive than if the team was mainly women. And because of the fact that statistically, men are more likely to have a shorter life expectancy than women. And so you might just see that the thing is, as well, which is brilliant. And I’ve heard some different things about this recently. And it’s really important to know, so with group life insurance,

20:57

and relevant life insurance, so group life insurance, you don’t have to insure everybody with group life insurance in a company, you have to insure everybody of the same category. But you don’t have to insure everybody. So like, as an example, you could do relevant life insurance for the directors. And then you could have a group scheme that covers all of the stuff, you know, the directors don’t have to be insured by the group scheme. And you could play about you could do these different things. So it might be the directors are just like, right, well, actually, you know, they might be at a level where they weren’t, you know, wanting a million pounds each, let’s say, as an example. But then they do still want to do something for the rest of the thing. But they want to have theirs fixed premium, they want to know it’s set in stone, the group life insurance is probably going to be set up on as a non contractual benefits. So they might want to change it at time, they might want the facility to be able to cancel it if they want to going forward. And so with everybody else, at the most they write for us do the relevant life insurance. So you might obviously, you’re probably advise on that. And then we’ll just say, right, so then we’ll just do a group life insurance policy that says, Every, essentially everybody but the directors is covered for this, I and you might even do it where you say sorry, alright, so the manager is going to be insured for this, all of the staff will be insured for that, there’s lots and lots of ways to build it up, you can mix between the two, you just have to make sure that you are doing it right in terms of the categories. So as an example, I am going to do a piece on Group Life Insurance and episode at some point, but you know, you, you don’t have to ensure everybody is very specific, but you also can’t not insure people in same category. So as an example, if you’ve got four managers, one of them is really not pulling their weight. And you know, they’re not bothered about having this insurance, they’re just kind of they’re just kind of phoning it in, we can’t not insure them, if you were insuring managers, you’d have to insure all the managers so we’ll then we’ll talk about that a

Kathryn Knowles  22:51

bit more another time. And in terms of relevance, life insurance, there is also you know, we do hear what people asked about relevant critical illness cover, it was available for a while is not available now it is there was really specific rules, again, there was quite a lot of legal elegancia legal to do, let’s say to do about relevant critical illness cover is not available now, you do now have at the moment relevant employee significant illness cover, which is it is available through a company and you can set it up you know, so that it is it is company owned for somebody for an employee of the company

23:32

is completely up to it, it’s a very, very stripped down critical illness policy. So it covers obviously your key things you know, which is something that you really really want it to do. And personally, I tend to say to people that you know, instead of doing it that way, I would probably just do a personal critical illness policy because it covers so much more and and you know, it’s important to try and make sure that we get you know, a good amount of conditions covered even though I say that even though the majority of claims for the critical illness side of things are cancer how such stroke closely followed by multiple sclerosis, you just never know. So personally, I do quite like to do it in a say in in a we tend to do it more on like a personal critical illness rather than going down the relevance and play significant illness side of things. But I’m sure that many people are many advisors do advise on us are very confident on the way they’re doing that and what that means for their clients. Just on that one giving my opinion as to what to do.

Kathryn Knowles  24:31

So in terms of a case study, just a nice simple one for you all so I had somebody we’re doing relevant life insurance mid 40s nonsmoker with an increasing life insurance of tuition of 50,000 pounds to age 75. And the premium for that was 35 pounds per month. So when I was saying about obviously life insurance being really cheap, obviously life insurance can be very cheap. This was all on normal terms 35 pound a month as somebody who is in their mid 40s who’s wanting an insurance policy that is going to be increasing Over time, for the next 30 years, it’s not bad, and obviously brilliantly paid for by the company offset against corporation tax. If they want to retire sooner, then they can either just cancel the policy, or they can convert it to personal and keep it going until age 75, which is a is a nice amount to have there for them and for their loved ones who will be benefiting from it. Thank you for listening everybody. Next time around is going to be back with me and we’ll be talking about another underwriting risk and how it alters or potentially doesn’t also Protection Insurance outcomes. And if you want to, as always visit the website practical hyphen protection dot code at UK where you can access all the episodes and as well as any kind of transcripts that you need. And of course, the CPD certificates which are on there thanks to our sponsors, the Opto members. Thank you very much, everybody, and I will speak to you soon