Life Insurance For Limited Company Contractors
Up until now, relevant life insurance policies for limited company contractors have been scarce. For sure, there are similar products, keyman insurance the obvious one. But none quite fit the bill.
You may even have a legacy life assurance plan from a past permanent role, in the shape of a “Death in Service” scheme.
This would have paid you a handsome cash sum on death; some plans also paid a pension for your dependent spouse.For the majority of these types of plans, the minute you leave the company, that cover stops.
But you know the importance of leaving your loved ones catered for after you're gone. Even if you have a family, it's easy to overlook life insurance when you're running your own business.
For one, it's low down on the day-to-day to do list. And for two, you've never had to pay the premiums from your own pocket before.
Group cover is impractical for small business
Your past employer would have paid for your Death in Service cover. This meant you wouldn't have suffered tax penalties on any benefits, either.
Circumstances for contractors and independent professionals are different. The likelihood is, policies you've been part of in the past were group plans. These are effective and tax-efficient models for large corporations.
But for legislative and commercial reasons they are impractical for the small business owner. Hence, there's been little point in offering such a product to the market.
The upshot is that contractors have had to fend for themselves and pay for this cover from their own back pocket after tax.
The other option has been to pay premiums from the company account. But again, the taxman is liable to take his cut even through the business.
Relevant Life Cover - what it says on the tin
You'll be glad to know, a number of insurers have identified this barrier and handed us a rope to scale it.
They're major life assurance companies who have launched a product targeting small businesses. Their product is the “Relevant Life Policy” and has been borne out this unserved need.
It's your company, not you, that takes out the policy. They're then written under a discretionary trust for the benefit of your dependents.
What are the tax advantages?
Premiums paid by your company are not treated as a benefit in kind and no personal tax liability falls on you.
This saves a significant amount of money, especially for the higher rate taxpayer. Moreover, there are no National Insurance consequences for you or your company.
Your company may even qualify for corporation tax relief on the premiums. But do check with your accountant that contributions qualify as a trading expense as part of your remuneration.
Benefits paid to your dependents under the trust are free of income tax. In most situations, they're free of inheritance tax, too.
Also worth noting, Relevant Life policies do not form part of your annual or lifetime pension allowances. Most company sponsored death in service schemes will count towards that total.
(Further details are available in the taxation footnote)
Advantages of using a discretionary trust - for you and your beneficiaries
Having benefits paid through a trust ensures they'll not be subject to tax as part of the company's trading income. Nor will they form part of the company’s assets.
Do note, there are restrictions in the legislation governing who'll receive the policy's benefits.
Beneficiaries who you can include are usually your family members and dependents. The use of the trust is the most practical way of ensuring you meet these requirements.
It is, however, discretionary, allowing trustees flexibility in to whom they pay the benefits.
Nominating your beneficiaries
To ensure that the trustees are clear of your intentions you can complete a “Nomination Form”. Although this is not legally binding on the trustees, it will help to guide them.
Your company will always be a trustee of the policy, but you will need to appoint another one. This could be your company secretary, your spouse or an independent trustee (such as your accountant).
Using a trust also ensures that benefits are free from both income and inheritance tax (see taxation footnote).
The insurer will also provide the trust document, tailored for this bespoke type of cover. There's often no charge for this service unless you decide to seek independent advice.
Are there any restrictions on the type and amount of cover?
There are regulations governing the amount you can insure your life for. The insurance company will also have it’s own limits. The main stipulations are:
- the most cover you can take out is fifteen times your income. This can include salary, bonuses, benefits in kind and regular dividends that you receive in lieu of salary;
- The cover must be paid as a lump sum on death before the age of 75;
- You cannot include any extra benefits, such as critical illness or disability payments.
Apart from that you can choose any term or level of cover you want as well as building in protection against inflation.
What happens if I change jobs?
If you decide contracting's no longer for you, you have two options.
First, the trustees can appoint the plan back to you. You can then carry on the cover as a personal policy. In that instance, you could also put it under a personal trust for the benefit of your dependents, if that's what you wanted.
Or, if you move back into an employed role, you could ask the new employer to take over the policy and trust. If they agreed, you'd need to change the trustees to your new employer.
There's also the chance that your new employer has their own scheme. Having a Relevant Life policy doesn't stop you from joining that, too. You can continue your policy alongside theirs to give your dependents even more benefits.
Likewise, if you went back to being a contractor, then the reverse can happen. You change the trustee back to your company and pick up where you left off.
Being able to protect our loved ones is one thing. Getting something out of it ourselves by channeling premiums through our company is a bonus. Relevant Life has made life insurance accessible and, well, relevant for contractors.