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There is a great new way to arrange life insurance in the UK which can open the door to significant savings and as we know every little bit helps at the moment. Under the new arrangements, for those who qualify, it can be possible to get the new life cover treated as a legitimate business expense.
So what are the possible savings? Firstly because your company will be paying the premiums and because they are an allowable business expense there is the potential for the company to obtain corporation tax relief. Secondly there is no Employer’s National Insurance due.
The first area of employee savings is a big one, Income Tax. A relevant life policy does not count as a benefit in kind, therefore if the company pays the premium there is no Income Tax to be paid by the employee in respect of the life cover contributions. Secondly the life company premiums do not give rise to Employee’s National Insurance.
This is good news for employers and employees alike and probably best news of all for those company directors who are both employer and employee at the same time.
For example the real gross cost up to now of a £200pm life cover premium to a 40% taxpayer after accounting for tax and employees and employee’s NI is a whopping £392.41pm which, after corporation tax relief nets down to £317.41pm.
Compare the above with setting up the same cover as a relevant life policy. The amount payable to the life company remains the same at £200pm, but this time there is no Income Tax or National Insurance contributions to add. After paying the premium the company claims corporation tax relief, which at 19% reduces the net cost to £162.00pm
By setting up the life insurance as a relevant life policy the total saving achieved for employee and company is 49%. All you need is a willing employer.
Its also worth mentioning one other group of people who stand to particularly benefit from relevant life policies and that is those who are close to the personal lifetime allowance limit. Traditional death in service scheme benefits are taken into account when calculating whether the personal lifetime allowance has been exceeded but relevant life policies are not included.
As usual there are a number of rules which need to be followed when setting up a relevant life policy. First of all relevant life policies are not available for the self employed, so if you are a sole trader or in a partnership you will not be allowed to have a relevant life policy (unless you also have non self employed earnings). Secondly the benefits of the life policy must be ‘reasonable’ in relation to the life assured’s income. Whilst this probably leaves room for the amount of cover to significantly exceed the ‘four times salary’ traditional death in service scheme maximum, which is another plus point, the amount of cover must still be ‘reasonable’. Also although income can include dividend income, it must not soley consist of dividend income (ie there must be some PAYE earnings).
Other key points to watch out for include a maximum age at the end of the policy of 75 and the plan must only provide life cover (no other benefits).
The policies have to be proposed by the limited company (the employer) on the life of the employee and written under trust for the life assured’s beneficiaries. Should one’s employment cease then the employer will have to cease paying premiums and cover will need to stop, unless (as would usually be preferable) the life assured takes over paying the premiums themselves.
Finally a couple of tips.
First if you are thinking about replacing life cover that you already hold with a relevant life policy, don’t stop your existing cover until you are in receipt of full acceptance terms from the new life insurer – the worst possible mistake would be to cancel existing cover that you already hold in anticipation of arranging more tax efficient cover only to find that the new insurer wont accept your application due to a health problem etc!
Secondly, at this moment the majority of life companies have yet to wake up to the potential cost savings that these policies offer so you’ll have to look around to find which companies are offering these policies or dare I say come to a company like Moneysworth who already know and can arrange the whole thing for you.
It has all the hallmarks of a classic taboo subject – business owners know that there is a risk to their business lurking in the background somewhere and evertime they think about it they feel vaguely uncomfortable. But the easiest thing for a business owner to do is to move swiftly on to something else. After all its not exactly a problem today and it might not even happen………
So what’s taboo? Death of course, or rather death and serious illness. To be more specific its the effect that these two events can have on a business, especially small and medium sized businesses.
If you want some proof how about this for a stat – ”39% of business owners expected their businesses to fold within the death or critical illness of a business owner”.
Here’s another one – ”58% of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner”.
[source – Intsitute of Directors and Legal and General – Business Protection Research]
‘Does it really matter?’ you might ask.
The question can be answered both quantitively and qualitively.
First the numbers – according to mortality data at http://www.actuaries.org.uk/ the following is true. Take a business with three male shareholders all aged 40 – the chances of one of them dying before the age of 65 is 19%. Thats quite scary – its going to happen a lot! The chances of one of the same three suffering a critical illness before the age of 65 is 64% – and thats very scary, a probability rather than a possibility.
But the qualitive answer is perhaps even more worrying. Because most people tend to ovoid spending time thinking about this issue, they do not consider the potential consequences. These could include but are not limited to the following
1) The bank might seek to call in personal guarantees regardless of the wishes of the business owners (and yes that could mean your home is at risk).
2) The business trying to raise a significant loan to buy out the shares of the deceased party
3) The business owners may have to try to raise the money required from personal assets such as the family home
4 The business taking on considerable new loan costs to repay the loan
5) At the same time the business suffering a fall in income and profits as a result of the loss of the business owner
6) Therefore the bank may not even agree to fund the share buy back, especially if trading conditions are not ideal, or if the bank lending is constrained due to general economic conditions
7) In the absence of commercial funding being available to the company or the remaining shareholders the family holding the estate of the shareholder may be forced to seek an external third party share purchaser
As someone who has faced this situation in business in real life I can assure you that these sort of risks are very real and potentially very damaging. In our particular case it was serious illness rather than death. Our first thoughts were obviously with the shareholder and his family -thank goodness he made a recovery, though it took some (very worrying) time before he knew that this would be the final outcome. During which time not surprisingly he decided that his priorities had changed and he no longer wanted to be involved with the business. Luckily for us we had the correct life/ critical illness policies and legal agreements in place which meant that at the right time the required funds were in place to finance the share purchase and with no need to take on additional debt. At the same time our eyes were opened to the consequences of how differently things might have turned out had we not been properly insured.
Here’s an odd thing – most businesses think nothing of insuring their business premises for fire. They don’t do so because there is a high risk of the insured event actually occuring, they do it because of the size of the potential financial consequences for the business that would follow a fire. Literally a fire could destroy an unprotected business.
So given the fact that the death or critical illness of a business partner or shareholder is so much more likely to actually occur it might be said that any of the 58% of businesses with no plan referred to in the research (above) are very playing with fire. Sensible action would be to take expert advice on the matter before its too late.
We recently had an interesting case concerning diabetes and critical illness cover where we acheived an unusual outcome (more of which below). But its worth looking first at the general current landscape for critical illness cover and diabetes in the UK protection market. Is diabetes a critical illness for insurance purposes? Can you get critical illness cover if you already have diabetes?
Diabetes is a progressive and life changing illness that can lead to some potentially very serious outcomes. So does diabetes count as a critical illness? Does it appear on the list of critical illnesses generally covered on most insurance company critical illness plans? The answer is mostly no. One exception to this is late onset type 1 diabetes which is included as a critical illness condition by at least one major insurer. Late onset type 1 is relatively unusual so the chances of making a claim for this are very small. But it can and does happen. We know a lady who fell ill on holiday last year and was found to havean Hba1c reading of 27 – in her late forties she was diagnosed type 1 immediately and also then had to face her life long phobia of needles.
But for the vast majority of critical illness policy holders, the diagnosis of diabetes Type 1 or Type 2 will not provide them with a valid condition on which directly to make a claim.
But the story doesn’t end there. As 2.4 million UK diagnosed diabetics know one of the key issues for them is their increased risk of cardiovascular complications. Indeed this is why many diabetics are put onto ‘preventative’ medications for blood pressure and/or cholesterol in order to try and prevent the development of additional cardiovascular risks.
So here is some good news. Even though the diagnosis of diabetes will not in most cases prove to be a valid health condition on which to make a claim under a critical illness plan (despite the seriousness of the condition) policy holders are more likely to be able make a claim if they go on to a heart attack or stroke, as these are more generally valid critical illness claim conditions.
So much for people who don’t have diabetes now, what about those who do? Is it possible for diabetics to obtain critical illness cover?
The answer to this question is genarally negative. Nearly all the mainstream insurers currently will decline applications for critical illness cover from diabetics, irrespective of type, duration or the level of control levels.
But…… there is one company currently who will consider offering critical illness cover to some diabetics. If you are 40 or over and have good control with no complications, you might be able to obtain terms. For those who are able to get cover there will be exclusions on the policy in the main for any cardiovascular conditions. Given the increased risk of suffering cardio vascular conditions some diabetics may consider that the cover excludes the very health risks they wish to cover. Its difficult to argue with that, although it is worth mentioning that a discount in premiums is generally applied to reflect the excluded cover so that diabetics will pass less than non diabetics for once! Also the remaining cover still covers a lot of conditions including cancer, which is a huge area for actual claims.
Finally just to go back to the story of the recent client for whom we acheived an unusual result. The client was seeking critical ilness cover. On paper he had been diagnosed with diabetes and received medication for diabetes. However in his case the doctors felt that the diabetes had been caused as a side effect of strong medication for another health condition which had effectly caused his pancreas to stop making insulin. Furthermore the effect was temporary and the client had to be taken off treatment when his Hba1c readings dramatically dropped and if was found that his pancreas had resumed production of insulin. Since then the clients blood readings have stayed within ‘normal’ levels and he has not needed any medication.
Whether or not anyone who has been diagnosed with diabetes can ever be described as an ‘ex’ diabetic is a hot topic of debate and one for which there are others far better than I to comment upon. However what is for sure is that for insurance companies generally, its ‘once a diabetic always a diabetic’. Which was exactly the line taken by all the insurance companies when we contacted them. Probably it didn’t help when we told them that this client especially was looking to be treated as a non diabetic so that he could have cardio vascular conditions included in his critical illness cover. The door was firmly shut.
With one exception! We did find one company who were willing to take on board the unusual aspects of this case and who were willing to offer our client the cover he sought. So he is now covered for, among other critical illness conditions, heart attack and stroke – two of the three main critical illness claim areas for critical illness claims for.
NOTE: For more up to date information on this topic read the more recent blog dated 24th August 2011
It also highlighted the importance of having a comprehensive will to protect your wishes.
These statistics show that millions of people are putting the financial future of their families at risk, should they lose their job, fall ill or pass away.The European Court Of Justice will deliver next week its final written judgement in a case which may see the end of gender pricing differentials for life insurance premiums. But we’re not singing with joy.
The intial adjudication back in September 2010 confirmed that differential pricing contravenes the fundamental principle of equal treatment on the basis of gender. This shouldn’t come as a surprise, for the ongoing fight against discrimination has been one of the key political and social markers of recent years. But do we really care as much as we say we do?
At Moneysworth we are committed to helping people with health issues find life cover. The life cover isnt for them personally, it never is, it’s to protect their families and their children. Many of the people who come to us looking for our help have been previously turned away and rejected. Furthermore, given that most will have to pay higher premiums (discrimination) due to their health, we strive to look for the best available terms, so that they pay the least extra amount possible.
Thank goodness, using our specialist knowledge of the insurance market, we are able to obtain cover for the majority of clients who come to us. Indeed it is pretty much the case that if we are unable to find cover, customers are unlikely to find it elsewhere. As our blog develops we hope to provide an insight into our work and some of the many cases that we work on.
But today, I would like to pause and spend a brief moment to think about the people that are unable to obtain cover.
Insurance companies set premium levels in line with the amount of risk that they perceive to be present. But if the risk is too great they can choose not to offer cover.
What then for the families who happen to have a father or a mother with a health condition considered so serious that no insurance company will touch them? Not only do they face the chance of losing a parent at an early age, but also of being left with little or no financial support.
So before we start patting ourselves on our backs and congratulating ourselves on our progress in steadily eradicating the curse of discriminition from modern society lets remember just one group who remain firmly on the outside and who remain totally discriminated against.
Its not that next weeks ruling isn’t important, its not even that its not fair. Its that a much greater unfairness will remain after next week.
Andy Wilkinson
