Why contractors save tax with life insurance
Independent professionals have, for time immemorial, faced problems finding relevant life insurance. That's changed, but it's taken a new product to plug the gap. Our guide explains.
One of the biggest barriers contractors faced with life cover was the inflexibility of its policies. They came with a total inability to transfer their policy should they decide to stop trading.
Another issue was the cost of setting up “like” cover that they'd enjoyed whilst working at a larger corporation. It's difficult to find 'Group Cover' when there's only one of you.A new product to market has revolutionised the way even One Man LTD contractors and freelancers can afford and implement life insurance. Furthermore, independent traders can take their policy with them if they rejoin the rat race.
As a bonus, there are tax-savings available too, if you pay cover through your company. All told, relevant life cover becomes a must-have product for all independent professionals. NO excuses!
Death-in-service benefits now an affordable option for contractors
Contractors need no longer concern themselves with benefits-in-kind for funding life insurance. Put through their business as an expense, in the majority of instances, the premiums count toward tax relief.
That means you can now protect dependents in the same way as through the death-in-service policy you had as an employee.
This hasn’t been easy to accomplish for the small business owner up until now. In recent times the amount of deductible benefits-in-kind have become fewer and farther between.
Insurers have sought ways to counteract the limitations on what you can put through your company accounts. The new product panders to these new guidelines. So (at last), smaller companies can now provide their employees with meaningful death-in-service protection.
Compared to paying mainstream premiums after tax, you’ll also see a significant monetary saving. You can now transfer the cost of life insurance to your business, rather than fund its upkeep from your post-tax income.
What tax benefits apply to small business owners?
Employer-funded life insurance has historically been the sole provenance of large businesses.
To qualify for ‘group life’ cover, insurers have demanded a minimum headcount. This makes sense, as it makes the cover feasible and cost-effective for the insurers. And, of course, the employer.
The only option for contractors was to pay premiums after tax from their take-home salary or take out Keyperson cover.
Policy holders could channel premiums for the latter through the company. However, the cover itself wasn’t a true match for the needs of the small business owner.
Relevant Life policies are different. The boffins who've created the product have done so with the limited company contractor in mind.
It doesn't matter whether you draw your income as salary or dividends. Relevant Life uses a multiplier of your gross annual income to work out your death-in-service benefit.
Relevant Life is a stand-alone entity
In addition, the premiums are tax-deductible premiums. The whole concept offers a remarkable way to protect your loved ones, come what may.
Neither does Relevant Life affect any pension allowances you may have accrued to date. Whether you've used your annual or your lifetime allowance, it makes no difference.
Therefore, the cover provides great protection if you've built up a sizeable pension pot already. You can enjoy tax relief on both, providing contributions and premiums go through your business.
The added bonus for your dependants is that the benefits upon death aren’t subject to Inheritance Tax. The trust that you create when you take out the cover also becomes the payee, making Relevant Life a real tax-saver all round.
Who does a Relevant Life policy cover?
This life insurance is particularly pertinent for contractors. It was, after all, designed with them in mind. However, it’s just as beneficial for small business owner and entrepreneur, too.
The tax saving virtues make the premiums a lot easier to swallow than if you had to cough up after tax. If for no other reason than getting one over on the taxman, it’s worthwhile running a comparison.
Do the exercise. Find out how much you could be paying/receiving with Relevant Life cover. Then compare the result to your existing personal life cover premiums and potential benefit.
The nature of the policy is also flexible enough to incorporate your partner. However, they must be a registered employee and receive salary of some description from your business.
Knowing that you can incorporate your family should anything happen to either of you is priceless.
How much death-in-service benefit does the policy pay?
Relevant Life can cover any income-earning employee of the business. Each named individual receives cover for up to 20 times their total payment from the business.
That total amount isn't limited to salary, but can incorporate dividend earnings, too. For instance, say a stakeholder draws a total of £35,000 per annum from the business.
The split is £5k salary and £30k dividends. You can insure that stakeholder for almost a quarter of a million pounds ([£5k + £30k = £35k] x 20 = £700k).
In the event of their death, up to age 75, any named beneficiaries will receive that pay-out in one hit.
What happens if I close my business?
Flexibility is what makes Relevant Life the single best life insurance for contractors, in my opinion.
If you call time on your limited company business, you can maintain the cover by transferring the policy to whomever you go on to work for.
Excuse me? Well, it all works so well together because the policy revolves around the trust you create. Any contributions are both safe from company liabilities and transferable.
Some employers may, for whatever reason, want to take you on board, but not your policy. It's not a problem; you can still maintain the premiums from your personal account.
Previous death-in-service policies cannot match this flexibility. They came with the "non-transferable" caveat and many still do. Irrespective of how you go about your business in the future, you can take this policy with you.
You may even decide that you've made a mistake by returning to work as an employee. If you want to create a new business (again), you make them the trustee and pick up from wherever it was you left off.
Dual-purpose life cover that works for employees, too
Another point of note is that individuals can become beholden to their employer if their health is suffering. Being uninsurable beyond permanent employment can deter some from returning to contracting.
With Relevant Life, your health is only underwritten once at the outset. Any medical issues afterwards won’t necessarily affect your ability to remain insured.
The policy is so portable, once you take out the cover it’s yours your entire working life.
And, yes, that's awesome from a contractor’s viewpoint. But also, this type of cover could benefit direct employees with health issues.
We know that potential employers shouldn't show bias at the interview stage. And we know our responsibility with disclosure.
But say you developed a condition that might ring alarm bells even before you get to interview. You've sent off applications and you're sure it's 'condition x' that's your downfall. You can satisfy any potential employer that death-in-service isn't an issue as you've got it covered.
Relevant Life gives you:
- the peace of mind of lifelong life insurance;
- protection for your family and dependents, should the worst happen;
- considerable savings on your tax bill by routing cover through your limited company;
- freedom of neither being beholden to employer nor your limited company, as you can take Relevant Life cover with you.
Now that’s what you call cover, from every direction.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.