director life insurance

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What is Director Life Insurance

Director life insurance, also known as relevant life insurance, is a policy that directors can take out through their company. Unlike a personal policy, the plan is paid for and owned by the company.

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 policies, including:

The Payer

Relevant life: Paid for by the company
Personal life: Paid for by the individual

Tax treatment of premiums:

Relevant life: Usually tax-deductible for the company
Personal life: Paid from after-tax income

Payout:

Relevant life: Generally tax-free to beneficiaries
Personal life: Usually tax-free, but may be subject to inheritance tax in some cases

Ownership:

Relevant life: Owned by the company but held in trust for beneficiaries
Personal life: Owned by the individual

Eligibility:

Relevant life: Limited to employees and directors of businesses.

What’s the difference between director life insurance and personal life cover?

The main areas of distinction between personal and director life insurance are their intended uses and tax implications. Director life insurance is a company-paid policy designed for employees and directors of businesses, offering tax benefits. Premiums are typically tax-deductible for the company and not treated as a benefit-in-kind for the insured. The payout is usually tax-free for beneficiaries.

In contrast, a personal policy is taken out by individuals to protect their families, with premiums paid from after-tax income with no corporate tax advantages.

While both provide a payout on death, director life policy is more closely tied to one’s role in a business, whereas personal life insurance offers broader coverage regardless of employment status.

Use our relevant life calculator to see the difference in premiums and what can be saved by using director life insurance.

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 cover?

While not necessary, having director life insurance is undoubtedly advantageous. It’s especially beneficial for those who don’t have a large group life insurance scheme available through their company or for businesses looking to provide additional cover beyond existing schemes. In other words, everyone involved in the company would benefit, and in the worst event, so would their families.

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 cover by opting for a director’s life policy rather than personal cover. This is due to tax savings. Small businesses can claim life 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 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 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 is not available with director life insurance plans, as it is not an approved tax benefit, according to HMRC. If you have life cover 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. However, AVIVA do offer a significant illness option which is a scaled-down version of critical illness.

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.

It’s deductable primarily because it’s considered a legitimate business expense.

Here’s a concise explanation:
The UK tax authorities (HMRC) recognise it as an allowable business expense because they’re viewed as a form of employee benefit that serves a clear business purpose.

By providing financial protection for key employees and their families, the policy helps the company attract and retain valuable staff. This, in turn, contributes to the stability and continuity of the business.
Since the policy is taken out to benefit the business (by protecting its crucial human assets) rather than for personal gain, the premiums can be treated as a business expense. This allows the company to deduct the cost from its taxable profits, effectively reducing its corporation tax liability.

How much cover can we take out?

The amount of cover depends on the insurance provider you choose and your age. The maximum amount is set as a multiple of the total remuneration. The exact values will vary according to the individual and the insurance company, but here is a rough guide to the level of cover companies can take out:

When you search for director life insurance, it’s worth spending some time researching policies and comparing prices from different providers. Some may offer higher levels of cover than others.

Does it 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.

Which providers offer director’s life cover?

Most UK life providers offer directors cover. Examples include:

To find life cover for company directors, it’s beneficial to research online, use search engines, read reviews and contact companies to compare quotes and get prices.

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 cover?

Here are some top tips to help you get the best deal:

Use comparison websites: you can use comparison websites to identify 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 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.

Use a broker: Like us, who can search the whole of the market and get you the best policy at the lowest price!

Read reviews and testimonials: it’s always wise to choose a reliable, credible, trustworthy provider for your life 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 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.

What happens when you apply for director life insurance?

Applying for cover is similar to applying for a personal policy. 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:

Insurance providers will use the information you give them to figure out the premium. If you are happy with the quote and you wish to go ahead, you’ll need to complete the policy application form. If the company is satisfied that you meet the criteria, they will approve your application and your cover will start on the agreed date. Your business will pay the agreed monthly or annual fee for the duration of the term.

What are the benefits of a director life insurance policy?

If you run a limited company, and you’re thinking about getting life cover, there are two main options. You can buy a personal life policy or take out director life insurance. Director life policies offer a raft of benefits for small businesses. It’s wise to make sure you’re aware of the advantages before you go ahead.

Benefits include:

Saving money: high earners can save around 50% on life insurance compared to a personal life insurance policy. For those on the 20% tax rate, the savings are around 35%.
Tax savings: the company can claim the policy as a business expense and beneficiaries also benefit, as the policy is not subject to inheritance tax
Suitable for small companies with a few employees: if you run a company that has fewer than five employees, you may find it difficult to get life insurance that offers group benefits If you can’t get a group policy for your employees, director life insurance is an excellent option. This saves employees money through income tax savings.
Contributions don’t count towards the lifetime pension allowance.

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