Why you need life insurance
In the event of your untimely death, have you made provision to provide an income for your family and to pay off outstanding debts, such as your mortgage?
A Relevant Life Insurance policy will provide your dependants with a lump sum based on a multiple of your income if you die. It works just like the death-in-service benefit you may have enjoyed previously as an employee.
Flexible options enable you to choose life cover depending on your family needs. You can also take the policy with you if you return to permanent employment.
A Relevant Life Policy is paid for by your limited company, so you can enjoy tax relief on premiums, no benefit in kind (BIK) implications, and payouts free from inheritance tax.
Need more detail? See the top relevant life insurance benefits.
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Contractors with existing policies paid for personally can make savings or increase their level of cover at no extra cost by moving to a Relevant Life Insurance Policy. See example
Benefits
The top benefits you’ll gain from relevant life insurance:
- Lump sum: Your family receives a tax-free lump sum payout if you die; which can be used as they choose, for example to pay off debts and generate an ongoing income
- Tax relief:You may save on income tax and corporation tax as premiums are a legitimate business expense paid directly by your limited company, not by you personally
- No BIK charges: You suffer no benefit in kind income tax and National Insurance Contribution (NIC) charges
- Payment 25 X earnings: You can choose a payout of up to 25 times your earnings, including salary and dividends
- Multiple policies: Your spouse or civil partner can take out an additional policy, if employed by your limited company
- No inheritance tax: Your dependants will pay no inheritance tax on the lump sum payout, as the policy is shielded by a discretionary trust arrangement
- Flexible: Your policy follows you and can continue if you move back into permanent employment. This means no new policy underwriting or medical examinations are required
Example
A contractor has a life insurance policy for £1m paid for out of his personal income, costing £60 per month.
As a higher rate tax payer, the contractors' limited company earns a profit of £100, which is then subject to corporation tax at 20%. The remaining £80 is declared as a dividend which is then further taxed at 25% tax, leaving £60 in the contractors pocket to fund his life insurance.
Moving to a Relevant Life Policy, the contractor has two options:
- Save £252 per year: Keep the same level of cover, paid for by the company. Because of the tax relief the profit only reduces by £60 (not £100) meaning the contractor will have the same cover and £21 per month left over after tax - a saving of £252 pear year
- Increase cover by 66% at no extra cost: Increase the level of cover by 66% by paying £100 per month by the company, without it effecting the contractors income
In addition to making savings or increasing cover, the contractor has a policy where no inheritance tax is liable on the pay out.
Policy Options
Contractor life insurance cover – policy options for limited company contractors
Limited contractors can protect their families with a life insurance policy funded by their business
Why contractors need life insurance
Contractors don’t have employee benefits, so must ensure their loved ones have a financial safety net if the worst happens.
Will my current life insurance cover me when I go contracting?
Contractors with existing life insurance will find the policies are still valid, but they may not provide sufficient cover.
Relevant Life insurance plans - 9 key facts for contractors
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Using a life insurance trust to maximise payout and reduce tax bills
You need to use a life insurance trust to avoid your family facing significant tax bills on life insurance payouts. Here's how.
How to save tax on your life insurance
Contractors can save tax on life insurance by taking out a Relevant Life Policy (RLP) via their limited company.
Relevant life policies versus Key person insurance – explained
Contractors need to understand the differences between Relevant Life Policies and Keyperson insurance to choose the best protection for their needs.