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Conditions of cover

The first of a new three-part series on relevant life policies

Last week I took a look at the interesting and potentially powerful principle of permission-based marketing, using the Jack Wills business as an example of how well this can work.

The basic premise is that people increasingly resent interruption and money spent on marketing campaigns with interruption at their heart can turn out to be expensive and ineffective. The more subtle approach of selecting a tribe or hive, focusing on its needs and spending time seeking understanding of and being understood (accepted and trusted) by the tribe, is likely to yield more powerful longer-term results for some businesses.

Becoming part of the tribe, being accepted and trusted by it can yield extremely powerful results. However, you need to win this status through authenticity and the resulting earned trust. For financial advisers, this can come through constantly proving that you know about products (especially complex products), you know about tax and you know how to apply that knowledge to improve the financial wellbeing of your clients

Many areas of financial services will require an adviser’s proactivity to move them on to the client’s to-do list though. This will be particularly so in relation to protection business. Life insurance is still sold and not bought – and that is (mainly) why there is still a substantial protection gap.

The advent of the relevant life policy gives advisers an excellent opportunity to put forward an extremely tax-attractive solution that can also act as an attraction and retention tool for keypeople

There are many reasons why business protection is not more prevalent. Barriers exist at client, adviser and solicitor/ accountant level. Much has been written about business continuity and business succession cover. One area of business-related protection need that is less frequently addressed is providing cover for the family and dependants of employees and directors. The advent of the relevant life policy gives advisers an excellent opportunity to put forward an extremely taxattractive solution that can also act as an attraction and retention tool for keypeople.

What is a relevant life policy and what is its attraction?

A relevant life policy:

  • is a term insurance effected by an employer on the life of an employee and funded by the employer
  • provides for a lump sum benefit payable on death before age 75. It may also provide benefits in respect of the ill-health, disablement or death by accident of the employee during employment
  • provides no other benefits and does not have a surrender value at any time
  • is effected by the employer subject to a trust
  • is designed to meet the criteria for a single-life relevant life policy set down in sub-sections 393B(4)(b) and (c) of the Income Tax (Earnings and Pensions) Act 2003.

What is the legislative background to the relevant life policy? Well, following the changes to pensions in the UK introduced from April 6, 2006 – that is, since A-Day – only certain types of benefit, including death-in-service benefits, are treated in a favourable way for tax purposes. It is well known that registered pension schemes provided by employers benefit from special tax concessions.

Since A-Day, employers can also set up unregistered schemes. Such schemes are generally treated as employer-financed retirement benefits schemes (EFRBS) unless they provide excluded benefits, which include benefits under a relevant life policy. Most relevant life policies are set up as excepted group life policies – that is, for a group of employees – but it is also possible to set up a policy which satisfies similar conditions but provides cover for only a single individual.

The legislative conditions to consider are predominantly found in section 393 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This section deals with “relevant benefits provided under an employer-financed retirement benefits scheme”.

Sub-section 393(B)(4) defines a relevant life policy as:

(a) an excepted group life policy as defined in section 480 of the Income Tax (Trading and Other Income) Act 2005, or
(b) a policy of life insurance the terms of which provide for the payment of benefits on the death of a single individual and with respect to which:
(i) condition A in section 481 of that Act would be met if paragraph (a) in that condition referred to the death, in any circumstances or except in specified circumstances, of that individual (rather than the death in any circumstances of each of the individuals insured under the policy) and if the condition did not include paragraph (b), and

(ii) conditions C and D in that section and conditions A and C in section 482 of that Act are met, or

(c) a policy of life insurance that would be within paragraph (a) or (b) but for the fact that it provides for a benefit which is an excluded benefit under or by virtue of paragraph (a), (b) or (d) of subsection 3 [of ITEPA section 393B].

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