A bit morbid we know, but this tool works out the risk of you passing away based on ONS Life Expectancy Data
Aimed at those who have set up a limited company, Contractor Life Insurance – known in the industry as Relevant Life Cover – is a tax-efficient way for contractors to provide a lump sum death benefit to their families.
Life Insurance for contractors is designed only to cover the individual’s death while the policy is in force. You can choose a policy term and you will be covered if you pass away during that term.
In most cases it does not (and cannot, for tax reasons) have any attached form of illness insurance, such as Critical Illness Cover.
For this, you’d have to buy a separate policy, such as Executive Income Protection. This would also be owned and paid for by your business and is designed to pay out a monthly income if you were too ill or injured to do your job role.
Relevant Life Insurance is aimed at small businesses, especially those with a solo director, but also including those with a very small number of employees.
Such companies are typically not eligible for a Group Life Insurance scheme thanks to insufficient staff numbers.
Some contractors work for an umbrella company, which acts as an employer for those on fixed-term contracts. They pay invoices, make PAYE deductions and may offset expenses.
In this case if you have not formed a limited company, we recommend straightforward personal Life Insurance as you’re not typically eligible for the tax benefits of Relevant Life Cover.
Some contractors merely register for self-employment without forming a limited company, particularly in the early days when they may be earning less. Sole traders should also take out personal life insurance as, without the limited company structure, they are not eligible for Contractor Life Insurance either.
While in an employed role, many of us can rely on employee benefits – at least to some extent – to provide protection should the worst happen.
Death in Service schemes provide Life Insurance for employees in large groups; Contractor Life Insurance is very similar, just on a much smaller scale.
When you move into a new role as the director of your own limited company, you lose any employee benefits you may previously have enjoyed. That’s where Contractor Life Insurance can step in.
If you have a family or outstanding liabilities you would want taken care of after you pass away, a Life Insurance policy is an integral part of ensuring this is taken care of.
We’ve taken the example of three healthy men of various ages and calculated the risk of them passing away during the next 15 years using the below Life Expectancy Calculator.
Their risk of death is as follows:
Age 30 | Age 40 | Age 50 |
---|---|---|
1 in 47 | 1 in 23 | 1 in 10 |
Relevant Life Insurance can offer significant savings over personal Life Insurance because the premiums are paid for by the business.
Tax liabilities vary depending upon a significant number of factors, including your personal circumstances.
While contractors should seek advice from an accountant on the specific taxation issues relating to their business, in general terms Contractor Life Insurance:
Given these factors, Contractor Life Insurance is typically a notably cheaper option than personal cover.
The cost of cover is based on the same underlying issues as for all Life Insurance, including:
As mentioned, there are significant tax savings to be made on Relevant Life Insurance compared with personal Life Insurance.
These savings are HMRC-approved, providing the primary purpose of the policy is not seen as tax evasion. This is something you’d need to discuss with your accountant, but in the vast majority of cases Relevant Life Insurance is completely HMRC-approved.
Example tax savings on Relevant Life Insurance are laid out in the table below.
Personal Life Cover
|
Relevant Life Cover
|
|
---|---|---|
Cost to Individual
|
||
Monthly Premium
|
£100.00
|
£0.00
|
Employee NI Contribution
|
£3.45
|
£0.00
|
Income Tax
|
£68.97
|
£0.00
|
Cost to Business
|
||
Premium
|
£0.00
|
£100.00
|
Employer NI Contributions
|
£23.79
|
£0.00
|
Gross Cost
|
£196.21
|
£100.000
|
Corporation Tax
|
-£37.28
|
-£19.00
|
Total Cost
|
£158.93
|
£81.00
|
Total Savings
|
49.03% |
By opting for Relevant Life Insurance over personal Life Cover you would make savings of 49.03%. That is a saving of £77.93 per month or £935.13 per year.
![]() | AegonAegon was founded as Scottish Equitable in 1831. Dutch insurer Aegon N.V. bought a 40% stake in Scottish Equitable in 1994 and became a 100% stakeholder in 1998. Maximum Cover:
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![]() | Legal & GeneralIn 2015, Legal & General won the ‘Life Insurance Provider of the year’ award from the Personal Touch Awards. Maximum Cover:
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Royal LondonRoyal London began as a friendly society in 1861, later changing to a mutual society in 1908. Today, Royal London is now the UK’s largest mutual life, pensions and investment company. Maximum Cover
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Scottish WidowsScottish Widows is a highly praised provider of pension and insurance products across the UK with nearly 6 million customers. Maximum Cover:
| |
![]() | ZurichZurich owns locations in more than 170 countries and provides insurance products and services on a global scale. Maximum Cover:
|
Yes, your limited company can pay for your Life Insurance via a product known as Relevant Life Insurance. This is a HMRC-approved Life Insurance that offers notable tax savings over paying for cover personally.
Premiums are eligible for National Insurance and corporation tax relief, while thanks to a specially-drafted trust the payout is also free from tax should you pass away during the term of the policy.
HMRC is very clear about the tax position of Relevant Life Insurance providing a number of conditions are met under section 393(4) of the Income Tax (Earnings and Pensions) Act 2003.
While the policy is taken out on the life of you as an individual, and must be underwritten on an individual basis, unlike personal Life Insurance it’s your company that owns and pays for the policy. It is this fact that offers the maximum tax efficiency.
The payout is paid into an appropriate trust, which keeps it separate from the business and your estate in the event of a claim.
Both Keyman Insurance and Contractor Life Insurance provide life cover for key people within the business. However, the purpose of the two policies is very different.
Perhaps the biggest difference between Keyman Insurance and Relevant Life Insurance is the beneficiary of the policy. Keyman Insurance benefits the business; Relevant Life Insurance, by its nature to retain its tax-efficient status, can only benefit individuals (or charities).
If you take out Key Person Cover, you’ll be providing business continuity to your company should you pass away or become critically ill. The lump sum payout will go into the business to be used however is appropriate to make up for losing you as a key individual, such as compensating for lost profits, hiring a replacement etc.
Keyman Cover can also be used to pay out a small sum to wind up the business in the event of a key individual’s death or to repay a corporate loan.
Contractor Life Insurance, on the other hand, is designed for your beneficiaries, paying out a tax-free cash lump sum to help financially at a very difficult time.
Unfortunately, unless you have a company structure set up to own and pay for the policy, you won’t be able to get Relevant Life Insurance as a self-employed sole trader and would need to consider a personal Life Insurance policy instead.
No, Relevant Life Insurance policies are not considered a P11D or benefit in kind for you as a contractor. This means there’s no additional tax to pay as a result of you having the policy.
Drewberry understands contractors and the way you work – we deal with people working this way day in, day out.
We’re also a fully independent insurance adviser and are not tied to any one insurer, meaning we can search the entire UK market to find you the best deal.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.
As a contractor there are lots of things to consider when it comes to your financial protection and doing it in the most tax efficient manner.
For help please don’t hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.
Tom Conner
Director at Drewberry