DIRECTOR LIFE INSURANCE
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What is Director Life Insurance
Director life insurance, also known as relevant life insurance, is a life insurance policy directors can take out through their company. Unlike a personal life insurance policy, the plan is paid for and owned by the company.
Director Life Insurance policies are similar to traditional life insurance policies in that they provide a lump sum benefit to the beneficiary in the event of the insured employee’s death. However, they do have some unique features that make them distinct from traditional life insurance policies, including:
What does director life insurance cover?
Director life insurance offers a payout in the event of the director’s death. Some policies also cover terminal illness diagnosis, but this is not always the case. If this is included in the cover, a payout will be approved if the individual is expected to live for less than 12 months. Most director life insurance policies are level term, which means that the sum remains the same throughout the duration of the policy term. Some providers may offer increasing or decreasing plans.
Who needs director life insurance?
There is no legal obligation to buy life insurance, but it’s incredibly beneficial to invest in a policy if you have dependents or financial commitments, such as a mortgage. If you have life insurance cover, the money provided by the insurance company can be used to clear debts, pay funeral costs and legal fees and ease financial pressure for spouses, partners, children and other family members. Life insurance for directors offers the same benefits as personal life insurance, but it also provides tax efficiency advantages.
How much does director life insurance cost?
The cost of a director life insurance policy varies according to several factors, including:
Most directors can save money on life insurance by opting for company director life insurance rather than personal life insurance. This is due to tax savings. Small businesses can claim life insurance cover as a business expense, which offers access to 20% corporation tax relief.
To illustrate the potential savings, take the example of a personal life insurance policy, which costs £120 per month. Buying a personal policy means using your own money, on which you would already have paid national insurance and income tax. If you pay the high rate of tax on your earnings, this means you would need to earn £226.42 to pay for your £120 premium. If you have a director life insurance policy, you won’t pay income tax or national insurance contributions on your policy and you’ll be eligible for corporation tax relief. Instead of earning over £220, you’d need to earn £97.20 for the same plan.
Can we add critical illness?
Critical illness cover is commonly added to life insurance to provide additional protection against serious conditions, including heart attack, stroke and some types of cancer. If you have a personal life insurance policy, you can add critical illness for an extra charge. Critical illness is not available with director life insurance plans, as it is not an approved tax benefit, according to HMRC. If you have life insurance through a limited company, you may be covered if you are diagnosed with a terminal illness and you are expected to live for less than 12 months.
Is director’s life insurance tax deductible?
Director’s life insurance cover is tax deductible. This type of policy is classed as a business expense. When you file your taxes, you can deduct the policy cost, reducing your corporation tax outgoings.
Does director’s life insurance impact the pension lifetime allowance?
The pension lifetime allowance is the maximum amount you can save in your pension pot without paying tax. If you exceed the limit in your pension savings, you will pay tax on the additional funds (the current rate is 55% for a lump sum payment and 25% for cash withdrawals and pension payments). The pension lifetime allowance for 2022/2023 is £1,073,100. The limit has been frozen until 2025/2026 (source).
One major advantage of a director’s life insurance policy is that it doesn’t impact the pension lifetime allowance. The policy does not count towards the pension pot, meaning that it can help directors to avoid paying tax on their pension savings.
Is director’s life insurance a benefit in kind?
A benefit in kind, also known as a BiK, is a product or service, which is given to a company employee free of charge or at a heavily discounted rate. All employers are legally required to disclose benefits in kind. Benefits in kind are sometimes known as fringe benefits and they are usually perks that are not included in the employee’s salary or employee benefits package. Director’s life insurance is not classed as a P11D benefit in kind by HMRC. This means that company bosses do not have to pay additional income tax or National Insurance contributions on them.
How do I get the best deal for director’s life insurance?
As a company owner, it’s natural to want to find the best director’s life insurance policy. If you’re looking for limited company director life insurance, here are some top tips to help you get the best deal:
Use comparison websites: you can use comparison websites to identify director life insurance providers and compare quotes. Enter your details, for example, your age and smoker status, and use filters to find suitable products that match your requirements. As well as giving you quotes, which you can save or request by email, many sites also provide reviews and a summary of the pros and cons. It’s worth comparing policies and reading the information carefully to determine which plans offer the best value for money. The best offer is not always the cheapest option. You may be able to access more comprehensive cover or incentives and offers if you’re prepared to pay a little more.
Contact insurance providers: most of the high-profile director life insurance providers appear on comparison sites, but it’s also worth contacting those you have on your shortlist directly to ask questions, find out more about the policies on offer and see if they can beat any deals you have seen advertised.
Read reviews and testimonials: it’s always wise to choose a reliable, credible, trustworthy insurance provider for your life insurance policy. Take the time to read verified reviews and customer testimonials. Look for companies that offer good quality policies and excellent customer service and support.
Seek expert advice: if you are unsure about which policy or provider is best for you, or you’d like to double-check before you buy a director life insurance policy, seek expert advice from an independent broker. Independent brokers will look for policies for you based on your needs and preferences and they can offer tailored recommendations. Some brokers will charge a fee.
Who can get life insurance for a limited company director?
Director life insurance policies are designed to benefit small business owners and their employees. If you have your own limited company, you should be able to access director life insurance. This type of financial product is recommended for the following:
What happens when you apply for director life insurance?
Applying for a director life insurance policy is similar to applying for personal life insurance. Once you have researched plans and providers, the next step is to fill in the application form. This can usually be done quickly and easily online. You will be asked to provide information to get a quote for your cover. Examples of questions you will be asked include:
What are the benefits of a director life insurance policy?
If you run a limited company, and you’re thinking about getting life insurance, there are two main options. You can buy a personal life insurance policy or take out director life insurance. Director life insurance policies offer a raft of benefits for small businesses. It’s wise to make sure you’re aware of the advantages before you buy life insurance.
Benefits of director life insurance include:
What are the requirements for director life insurance?
To get director life insurance cover, the applicant must meet the eligibility criteria and agree to pay the monthly or annual premiums. If you don’t pay for your policy, you may face penalties and your provider may cancel your policy.
It is also essential to note that director life insurance must be written in trust. Writing a policy in trust means giving control of an asset or assets to named beneficiaries. If you name family members as beneficiaries, for example, and your director life insurance policy is written in trust, your relatives will not have to pay inheritance tax on the funds they receive from the insurance provider. The payout is also not involved in the probate process, which means that there shouldn’t be any delays in accessing the payment.
Director life insurance is a financial product, which is designed specifically for limited company directors. If you own a limited company, you can take out director’s life insurance rather than personal life insurance. There are several advantages of limited company life insurance over standard life insurance plans, including tax savings and improved tax efficiency and lower overall premium costs. Small businesses with fewer than five employees that cannot access group plans can benefit from director life insurance. If the policy is written in trust, beneficiaries do not have to pay inheritance tax on the funds and they bypass probate. Director life insurance cover is a business expense, which lowers tax bills, and it is not classed as a benefit in kind. Your director life insurance policy will not impact your lifetime pension allowance.
If you think you could benefit from director life insurance, it’s wise to research providers, seek expert advice and compare quotes and policies.
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Relevant Life Insurance HMRC Tax Treatment (updated) 2022
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