How to Use Your Limited Company to Pay for Your Life Insurance
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How to Use Your Limited Company to Pay for Your Life Insurance
As a limited company director, you are constantly looking for ways to run your business more efficiently and minimise your tax burden. Yet, thousands of directors are still paying for their personal life insurance out of their post-tax, personal income.
If you are paying for life cover from your own pocket, you are missing out on one of the most powerful, HMRC-approved tax breaks available to business owners: Relevant Life Insurance.
What is Relevant Life Insurance?
Relevant Life Insurance is a type of employer-funded life cover that provides a death-in-service benefit to employees, including salaried directors. It allows your company to pay the premiums on your behalf without the costs being classed as a benefit-in-kind. If the worst happens, the policy pays out a tax-free lump sum to your family via a discretionary trust.
Read our Contractor Financial Glossary.
The Triple Tax Advantage
Switching your life insurance from a personal plan to a Relevant Life Insurance policy transforms an unavoidable expense into meaningful financial savings for your business.
Tax Saving | How It Works |
Corporation Tax Relief | Premiums are typically classed as allowable business expenses, deducted from profits before corporation tax is calculated. |
No Income Tax or NI | The policy is not treated as a benefit-in-kind (P11D), so neither employer nor employee pays National Insurance or Income Tax on the premiums. |
Tax-Free Payouts | The lump sum is paid to beneficiaries through a trust, free from income tax and outside the estate for Inheritance Tax purposes. |
Relevant Life Insurance is ideal for company directors seeking a tax-efficient way to protect their families, self-employed contractors operating through a limited company, and small business owners who want to provide death-in-service benefits for key employees but are too small to justify a group life scheme. It is important to note that this product is not available to sole traders.
The tax efficiency doesn’t stop at life insurance. If you want to protect your income against long-term illness or injury, Executive Income Protection operates on similar principles. The business pays the premiums as an allowable expense, protecting not just your basic salary but also your dividends and P11D benefits if you are unable to work. Directors can receive up to 80% of their total earnings, including dividends.
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FAQs
Am I eligible to take out a Relevant Life Insurance policy?
You must have a limited company to benefit from the tax savings that a relevant life insurance policy offers. If you do not have a limited company then standard Life Insurance will offer you the protection you need.
Do I get any money back if I don't die before the Relevant Life Insurance policy term ends?
No. There’s no cash value at any time. Just like standard Life Insurance at the end of your Relevant Life Insurance policy term you stop making payments and your cover ends.
Can my mortgage be covered with Relevant Life Insurance?
If you have an interest-only mortgage, your outstanding mortgage loan stays the same until you repay it at the end of the mortgage term. Level Relevant Life Insurance could cover this type of mortgage.
How does Relevant Life Insurance work? What do I need to know?
Like standard Life Insurance, it provides your loved ones with a large tax-free, one-off payment, or monthly payments if you pass away. It can be used to pay the mortgage off or help your family with living expenses. You are covered only for the duration (term) of the policy and cover only lasts while you keep up monthly premiums. Monthly payments can be reduced by combining this with a Critical Illness policy.
The key difference between Life Insurance and Relevant Life Insurance is that with Relevant Life Insurance the cost of the premiums is moved from your own pocket to your company expenses. This saves you tax and reduces the cost of your monthly premiums.
Additionally, this is not treated as a benefit-in-kind; the premium is not included as a P11D benefit, nor are premiums subject to National Insurance payments for the employer or employee.
There is significant tax relief with a Relevant Life plan and your business can claim Corporation Tax Relief on the premiums. Plus, the payout itself is tax-free.
Do I get any money back if I don't die before the policy term ends?
No. Like standard term life insurance, there is no cash value at any time. At the end of the policy term, you stop making payments and your cover ends.
What is Terminal Illness Cover?
Terminal Illness Cover will pay out when you contract an illness/ disease that has no known cure or has progressed to a point where it cannot be cured, and you aren’t expected to live longer than 12 months.
What's the difference between Relevant Life Insurance and Over 50s protection?
The main difference is that Relevant Life Insurance is a tax-efficient term policy, so it covers you for a specific amount of time, while over-50 life insurance is a whole of life policy, so it covers you for the rest of your life.
Typically to take out a Relevant Life Insurance policy you need to be aged between 18 and 77 to apply, and your coverage stops at the end of the policy term. You choose a cover amount, and if you want your cover to remain the same, be protected from the effects of inflation, or decrease over time broadly in line with a repayment mortgage or loan. You can take out a single or joint life insurance policy.
If you’re not sure which one might be right for you, speak to a Broadbench financial adviser.
What’s the difference between Relevant Life and Life Insurance?
Life Insurance is cover that you pay for with your own money. However, if you are set up as a limited company, you can pay for your Life Insurance through your business, as a tax-deductible expense, saving you 20%. This is known as Relevant Life Insurance.
Ready to stop paying more tax than you need to?
Fill out the form below to arrange a time to speak to a Broadbench adviser who specialises in relevant life insurance for Contractors.