As an accounting firm, we often guide limited company contractors and directors through the maze of financial planning, ensuring they make informed decisions to secure their future and optimise their business. One often-overlooked tool in this process is Relevant Life Insurance, a tax-efficient life insurance policy that offers significant benefits for both contractors and company directors. In this blog, we’ll explore what relevant life insurance is, how it works, and why it’s a smart choice for limited company contractors and directors.
Relevant Life Insurance is a type of life insurance policy designed specifically for businesses, allowing employers (such as limited companies) to provide death-in-service benefits to employees, including directors. Unlike traditional life insurance, a Relevant Life Insurance policy is taken out and paid for by the company, with the premiums qualifying as an allowable business expense. This makes it a highly tax-efficient way to provide life cover.
The policy pays out a tax-free lump sum to the employee’s family or dependents in the event of their death (or, in some cases, diagnosis of a terminal illness) during the policy term. It’s particularly popular among small businesses and limited company contractors who may not have access to large group life insurance schemes.
Relevant Life Insurance offers a range of advantages that make it an attractive option for limited company contractors and directors. Below, we outline the key benefits:
One of the standout benefits of Relevant Life Insurance is its tax efficiency. Since the policy is paid for by the company, the premiums are typically considered an allowable business expense, meaning they can be deducted from the company’s taxable profits, reducing corporation tax liability. Additionally, the premiums are not treated as a benefit-in-kind, so they don’t attract income tax or National Insurance contributions for the employee or director. This makes it a cost-effective way to secure life cover compared to paying for a personal policy out of post-tax income.
For contractors and directors operating through a limited company, paying for personal life insurance from post-tax income can significantly reduce take-home pay. By contrast, Relevant Life Insurance premiums are paid directly by the company, leaving more disposable income in your pocket. This is particularly beneficial for contractors who want to maximise their earnings while still protecting their loved ones.
Relevant Life Insurance policies can be tailored to suit the needs of the individual and their family. The policy can cover directors, employees, or even contractors working through their own limited company. The payout is typically a multiple of the insured person’s salary (often up to 25-30 times their annual income), providing substantial financial protection for dependents.
Unlike some group life insurance schemes, Relevant Life Insurance payouts do not count towards an individual’s pension lifetime allowance. This is a significant advantage for high-earning directors who may be close to or exceeding their pension allowance, as it allows them to secure life cover without affecting their retirement planning.
For contractors and directors, running a limited company often comes with financial pressures and uncertainties. Relevant Life Insurance provides peace of mind by ensuring that, in the event of your death, your family or dependents will receive a tax-free lump sum to cover living expenses, debts, or other financial commitments. This can be especially important for those with young families or significant financial responsibilities.
For small limited companies, setting up a group life insurance scheme can be costly and administratively complex. Relevant Life Insurance offers a simpler, more affordable alternative, allowing small businesses to provide valuable benefits to key personnel without the overheads of a larger scheme. This can also help with employee retention, as it demonstrates a commitment to their financial security.
Relevant Life Insurance is particularly suited to:
While Relevant Life Insurance offers numerous benefits, there are a few points to keep in mind:
Navigating the complexities of Relevant Life Insurance requires careful planning to ensure it aligns with your business and personal financial goals. We would recommend speaking with an Independent Financial Advisor (IFA) as they are best placed to review your overall position, suggest cover policies, discuss pension, and finance assistance. Please speak with your dedicated accountant, and they will suggest an IFA that is right for you. Alternatively, if you wish to sort yourself, a quick online search for Relevant Life Insurance should provide you with many options.
Relevant Life Insurance is a powerful tool for limited company contractors and directors, offering a tax-efficient way to secure life cover while maximising take-home pay and protecting loved ones. By leveraging the tax advantages and flexibility of these policies, you can enhance your financial planning and gain peace of mind for the future.
For your accountancy needs, please contact our team at Clever Accounts today. We’re here to help you make informed decisions and build a secure financial future for you and your business.
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