How to protect your life on the cheap

If you’re not yet financially independent, and you have dependants, you’ll need to ensure that you have enough life insurance to support them and to repay any debts if you die prematurely.

A policy which pays out a lump sum is usually best to pay off any debts like a mortgage. If you are an employee you might have life insurance provided by your employer, known as ‘death in service’ benefit. But if you don’t have such cover, or it isn’t enough for your needs, or you are self-employed you’ll need to take out extra life cover.

Most people obtain personal life cover through a personal insurance policy which runs for a set number of years, known as a term policy. Cover can be level, increasing (perhaps by inflation) or decreasing (perhaps to match a reducing repayment mortgage). Premiums can be paid monthly or annually - annual are cheaper - and are paid out of after-tax income.

Employees can lower the cost of life cover

If you are an employee, you can also arrange life cover through what is known as a relevant life policy (RLP). An RLP is a life insurance policy which is taken out by an employer on the life of an employee instead of, or in addition to, traditional group death in service cover.

The premiums of an RLP are tax deductible as an expense for the employer, and not treated as a taxable benefit in kind for the employee. You could agree with your employer to give up enough of your salary – known as salary sacrifice - to meet the cost of the premiums. Although cover through an RLP is typically 20% higher than a personal life policy, paying the premiums by salary sacrifice means that the net cost of an RLP is much less than a traditional life insurance policy paid out of after-tax income as shown in the following examples.

RLP table.PNG

Note: Assumes tax rates in England.

In the above example, in addition to the cover of the life policy, by sacrificing salary and having the employer pay the premiums on the RLP, a basic rate and higher rate taxpayer ends up nearly £320 and £455 per year respectively better off in net take home pay.

Salary sacrifice to fund an RLP isn’t right for everyone, particularly if you are a very low earner, as it might affect your accrual of certain state benefits. But otherwise, if you are employee (which includes being a controlling director) who needs additional lump sum life cover, why not find out if your employer would be prepared to pay for a relevant life policy through salary sacrifice.  

Jason Butler