Why see a financial adviser?

As a company director, is your life insurance as tax efficient as it could be?

Relevant life policies are a type of life insurance for employers to provide employees with death benefits.

They can be very useful when there aren’t enough employees to justify a group scheme or, where an individual requires a greater level of benefit than the group scheme provides. As directors working day to day in a business are likely to qualify as employees, this can be a more tax efficient way for a company director to provide life assurance benefits for his/her dependants rather than paying for it personally or it being treated as a benefit in kind.

An example of relevant life insurance and its tax efficiency:

Mrs Anne Other is a shareholding director of A.Other Ltd, an engineering business, and currently has life insurance in place. She wishes to review her insurance as she and her partner are expecting their third child and they would like more cover.

Comparing the two plans that her financial adviser recommends, Anne doesn't hesitate to choose the Relevant Life plan. Below you can see the sums that made her decision easy.

The Relevant Life Plan is particularly beneficial for Anne because she’s the director and shareholder of her own business, so all the savings go to her. If she were to pay for her life cover personally it would cost her £1,569.65 every year. By buying her cover through the company using a Relevant Life Plan, it only costs £800 each year. That’s £769.65 less, which is a saving of almost 50%.

(This is a fictitious example, and also assumes that the Relevant Life plan qualifies as an allowable business expense, which it usually is)

What makes this plan so good for company directors?

• You can effectively make a big saving on life cover compared with paying for it personally.
• Premiums are normally classed as a business expense and so are likely to be an allowable deduction for Corporation Tax purposes.
• Premiums and benefits do not count towards your annual or lifetime allowance – particularly important if you have a large pension fund or wish to maximise your contributions into your pension.
• Keeping the plan in trust offers the potential to plan for Inheritance Tax if your estate is or is likely to be worth more than the current Inheritance Tax threshold.
• Offers a cost-effective way to provide Death In Service benefits to your employees.

Any limitations or drawbacks?

Relevant Life Plans are not available for sole traders, equity partners of a partnership or equity members of a Limited Liability Partnership.

It’s a Single Life Policy, which means each plan covers one person – you, for example.

There’s no option to include joint cover, such as for you and your partner, in the same policy.

How do I take advantage of a Relevant Life plan?

Speak to your financial adviser who should be able to discuss the features in more detail.

The financial regulator wants a change to the way financial products are sold. A reaction to Martin Wheatley's speech.

In a speech published today, the Managing Director of the FSA, Martin Wheatley says he intends to change the culture of how consumers are viewed and sold to by some financial organisations. This follows the recent PPI and loan mis-selling scandals, as well as other ativities which have tarnished the public's view of the financial services industry, such as Libor abuse and the mis-selling of interest rate products to small businesses. Mr Wheatley goes on to say:

But what is also still clear is that we need financial services more than ever. Most of us need to save more for our retirements, but many are not doing enough. And all of us need a strong, profitable financial services industry that can give us the advice we need to guide us, that can help to protect us from the unforeseen, and that can deliver the products that will help us achieve our life goals.

I completely agree with this; it not only explains why the industry needs to be ethical, but also any business which correctly identifies and plugs such gaps in people's lives will be contributing to their own long-term success by doing so. But what does concern me is how the FSA or the FCA might further restrict the ways in which good quality, relationship-based financial advisers can operate, potentially resulting in fewer people receiving important financial advice.

Although Mr Wheatley's focus appears to be on the non-advised arena that consumers will most likely encounter on the web and along the high street, the ideas he presents are high-level and therefore rather general. At this stage it's difficult to ascertain whether protection products such as life insurance, critical illness, and income protection will ultimately be affected by these plans. If they are, then it's important to get the balance right between protecting consumers from unscrupulous salespeople and not hindering, but rather improving accessibility to and awareness of good financial advice.

Pricing Customers Out

If advisers were no longer allowed to be remunerated by providers of protection products this would inevitably lead to a fee-based system similar to that for investment advice following changes brought about by the Retail Distribution Review (RDR). The problem with this approach for protection, is that few consumers actively seek protection advice. I suspect even fewer would be willing to pay a fee for it, especially if protection and life insurance can still be bought on a non-advised basis direct from providers over the internet, for example.

If we did reach such a situation it would likely lead to more consumers buying cover which may not be best suited to their needs (e.g. paying more for level term when only decreasing mortgage protection is required; creating a potential inheritance tax issue; not correctly assessing what sums insured are needed for family protection; not writing policies in trust and thereby failing to avoid probate delays). Or, worse still, we could see more people not taking out any cover at all and leaving their families unprotected because of a public perception that advice is too costly.

The Best of Both Worlds

To ensure protection customers continue to receive the best outcome, I believe that insurance providers  should continue to pay advisers for finding their clients. This way, advice and recommendations can still be offered with no fee required from the customer. Upfront fees would no doubt alienate a large proportion of the public who might otherwise have benefited from protection.

What I think is key to improving the service which consumers receive, is that non-advised selling of protection products should cease. This would ensure that all protection customers have received advice on what is right for their present circumstances. Every policy written should have evidence of its suitability for each particular client, including less/more expensive alternatives that were available yet not appropriate, features which were included/excluded and why they were/weren't right for the client.

This would result in the best of both worlds for consumers: no fee means a similar proportion as at present would still perceive financial protection as an accessible and affordable avenue to explore; and offering protection on an advised-only basis minimises the opportunity for mis-selling (due to current methods of quality monitoring) as well as providing all the added benefits of the advice process.

Let's hope, for the sake of consumers and their families, the FCA see things from a similar perspective.