Group Life Insurance

Registered Life vs Expected Life

In the context of UK-based group life insurance, understanding the distinction between “expected life” and “registered life” is important for both policyholders and insurers, as it influences the management and expectations of the policy.

Registered Life

Focusing on Registered Group Life Policies in the UK, these are designed as an employee benefit and have distinct tax implications and beneficiary structures that differentiate them from personal life insurance policies. Here’s a detailed breakdown:

Tax Implications for the the employer

 

  • Premium Payments: Premiums paid by the company for Registered Group Life Policies are generally considered a business expense. Therefore, they are usually deductible for corporation tax purposes, which can reduce the overall taxable income of the business.
  • Benefit in Kind: Premiums paid on behalf of employees are not treated as a benefit in kind. This means employees are not taxed on the premiums as if they were additional income, which is a significant advantage over some other forms of employee benefits.

Expected Life

Expected Group Life Policies (EGLPs) provide life insurance coverage to employees outside of the registered pension scheme framework and are structured to offer benefits without impacting the Lifetime Allowance. Here’s how EGLPs differ and their implications:

Tax Implications for the employer

 

  • Premium Payments: Similar to Registered Group Life Policies, premiums paid by the company for EGLPs are generally tax-deductible as a business expense.
  • Benefit in Kind:  Premiums for EGLPs are not considered a benefit in kind, meaning there’s no income tax for employees on the value of the premiums paid on their behalf.

Tax Implications for the employee

 

  • No Income Tax on Premiums: Since the premiums are not considered a benefit in kind, employees do not pay income tax on the value of the premiums paid for their coverage.
  • Pension Lifetime Allowance: The benefits paid out from a Registered Group Life Policy do not count towards the employee’s Lifetime Allowance, unless the total value of the individual’s pension pots and the group life insurance payout exceeds the Lifetime Allowance threshold (£1,073,100 as of the 2020/21 tax year, with adjustments in subsequent years). This is particularly beneficial for employees nearing their Lifetime Allowance limit.

Tax Implications for the employee

 

  • No Income Tax on Premiums: Employees do not face any income tax on the EGLP premiums paid by their employer.
  • Impact on Lifetime Allowance: Since EGLPs are not registered pension schemes, the payouts do not affect the Pension Lifetime Allowance. This is a critical consideration for high earners or those close to their Lifetime Allowance limit.

Beneficiaries and Payout Structure

 

  • Trust-Based Structure: Registered Group Life Policies are typically set up under a discretionary trust. This means that the policy proceeds are paid into the trust upon the death of an employee, and the trustees then distribute the funds to the beneficiaries designated by the deceased employee.
  • Tax on Payouts: The payout from a Registered Group Life Policy is generally not subject to income tax. While the payout can potentially be subject to inheritance tax (IHT), the use of a discretionary trust usually means the benefit is outside the employee’s estate for IHT purposes, provided the trust is set up correctly and the rules followed.

    Beneficiaries and Payout Structure

     

      • Discretionary Trust: EGLPs are often held in trust, similar to Registered Group Life Policies. The proceeds are payable to the trust and then distributed by the trustees to the beneficiaries. This setup helps in managing potential inheritance tax (IHT) liabilities.
      • Inheritance Tax (IHT): The main difference in tax treatment between EGLPs and Registered Group Life Policies lies in their potential IHT implications. While the use of trusts can mitigate IHT exposure, EGLPs may be more likely to be scrutinised for IHT purposes, especially if not properly structured or if significant sums are involved.

    Comparison to Personal Life Insurance Policies

     

    • Premium Payment and Tax: With a personal life insurance policy, the individual (employee) pays the premiums from their post-tax income. This means they have already paid income tax on the money used to pay the premiums.
    • Benefit in Kind: There is no benefit in kind consideration since the policy is personal and not provided by the employer.
    • Payout and Tax: The payout from a personal life insurance policy can be part of the individual’s estate and may be subject to Inheritance Tax unless the policy is written in trust. If the policy is written in trust, it can help manage the inheritance tax implications similarly to the Registered Group Life Policy.
    • Pension Lifetime Allowance: Personal life insurance payouts have no impact on the Pension Lifetime Allowance since they are not connected to pension savings.

        Comparison to Personal Life Insurance Policies

         

        • Premium Payment and Tax Implications: As with Registered Group Life Policies, premiums for personal life insurance policies are paid from an individual’s post-tax income, without the tax efficiencies available through employer-paid premiums in EGLPs.
        • Inheritance Tax Planning: Personal life insurance payouts may form part of the estate for IHT purposes unless the policy is written in trust. Writing the policy in trust can offer similar benefits to EGLPs in managing IHT liabilities.

          In summary, Registered Group Life Policies offer significant tax advantages for both employers and employees, making them a valuable part of an employee benefits package. The trust-based structure for beneficiaries and payout can provide additional tax efficiencies, particularly concerning inheritance tax. In contrast, personal life insurance policies, paid for by the employee with post-tax income, do not offer the same tax benefits and can have different implications for inheritance tax unless properly structured.

              PIn summary, Expected Group Life Policies offer an alternative for providing life insurance benefits, especially useful for individuals concerned about the Lifetime Allowance or seeking a more flexible beneficiary nomination process. The key distinction lies in the potential for inheritance tax considerations, making the structure and administration of the policy crucial. Both EGLPs and personal life insurance written in trust aim to provide tax-efficient benefits to beneficiaries, but the employer-sponsored nature of EGLPs introduces unique tax advantages for premiums and benefits not typically available with personal life insurance policies.

                Choosing between a Registered Group Life Policy and an Expected (or Excepted) Group Life Policy in the UK involves considering several factors related to tax implications, eligibility, and benefits impact. Here’s why an organization or individual might choose a Registered Group Life Policy over an Expected (Excepted) Group Life Policy:

                 

                Tax Efficiency for Employer and Employee

                 

                • Registered Group Life Policies offer significant tax advantages for both employers and employees. Premiums paid by the employer are typically deductible as a business expense, and the benefit is not considered a taxable benefit in kind for the employee. This can make Registered policies a more tax-efficient choice for providing employee benefits.
                • Excepted Group Life Policies, while also offering tax benefits, may have more complex implications for inheritance tax (IHT) for the beneficiaries, depending on how the policy is structured and the overall estate planning of the deceased.

                 

                Pension Lifetime Allowance Considerations

                 

                • Registered Group Life Policies are tied to the pension framework, meaning they do not count towards the employee’s Lifetime Allowance unless the total pension pot, including the life insurance payout, exceeds the Lifetime Allowance threshold. This can be a critical consideration for employees close to exceeding their Lifetime Allowance.
                • Excepted Group Life Policies are designed to provide benefits outside the registered pension scheme, which can be advantageous for high earners already close to or exceeding their Lifetime Allowance. However, for most employees not facing Lifetime Allowance issues, a Registered policy might be more beneficial due to its straightforward tax treatment and potential pension integration.

                 

                 

                Simplicity and Administrative Overhead

                 

                • Registered Group Life Policies might be easier to integrate into an existing pension scheme and can offer a more straightforward approach for employers who already manage pension contributions. This can reduce administrative overhead and simplify the process for both employer and employee.
                • Excepted Group Life Policies might require more careful structuring to avoid potential tax pitfalls, especially concerning IHT. While they offer flexibility, especially in avoiding Lifetime Allowance issues, this comes at the cost of potentially increased complexity in policy administration and estate planning.

                 

                 

                Inheritance Tax (IHT) Planning

                 

                • Registered Group Life Policies are often set up under a discretionary trust, aiming to provide a payout outside of the employee’s estate for IHT purposes. This setup can be straightforward and efficient in avoiding IHT liabilities on the death benefit.
                • Excepted Group Life Policies also use trusts to manage IHT implications but may require more meticulous planning to ensure the benefit does not inadvertently become part of the estate or attract IHT.

                In summary, the choice between Registered and Excepted Group Life Policies often comes down to the specific needs and circumstances of the employer and employees, including tax considerations, potential IHT implications, and how the policy interacts with pension allowances and planning. For many, the Registered Group Life Policy’s integration with pension schemes, tax efficiency, and simplicity in administration make it a preferred choice, especially for organizations and employees not specifically concerned with the Lifetime Allowance.

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                  WHY CHOOSE US

                  We can also help with putting your policy into trust.

                  That means you can nominate somebody to look after the money if you die and there’s a payout before you want the intended recipient to get the money. A common example is parents who want to have the payout go to a child only once the child turns 18 or 21. Putting a policy into trust also ensures that the payout goes to your intended recipient and can’t be seized by creditors if you have any debts when you die. There may also be tax benefits to putting a policy into trust.