Director Life Insurance

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What is director life insurance

Risk management starts with the right insurance.

Director life insurance, also known as director’s life insurance and relevant life insurance, is a life insurance policy, which a business director can take out through their company. Unlike a personal life insurance policy, the plan is paid for by the company. If you own a firm and you take out life insurance through a limited company, your beneficiaries will receive a payout when you die, but there are also cost savings to consider. Director life insurance policies often offer a host of benefits in comparison to traditional life insurance plans.

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

Statistics suggest that around 35% of the British population has a life insurance policy (source). The majority of people have personal policies, which provide a payout in the event of the policyholder’s death. Limited company director life insurance works in a similar way to standard life insurance policies, but there are some key differences. It is hugely beneficial for company directors to understand the differences between life insurance policies to ensure that they make the right decisions

Application: individuals apply for a personal life insurance policy while a business applies for a limited company director life insurance policy.

Payment: the policyholder pays for a personal life insurance plan. With a director’s life insurance policy, the business pays for the cover.

Tax savings: one of the main benefits of director life insurance is tax savings. If you have company director life insurance, this can be classed as a business expense, which means your company will pay less tax. It’s also important to note that director life insurance is not a P11D benefit. This means that the company does not have to worry about additional income tax.

Eligibility: personal life insurance is available to anyone who fits within the criteria set out by the provider. Director life insurance is only available to company directors, contractors and consultants who offer services through a limited company and small business employees.

Level: there is a huge range of options to choose from in terms of the level of cover when applying for personal life insurance. If you take out director life insurance, the level of cover is set at a maximum limit depending on your remuneration.

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:

  • The insurance company you choose
  • The level of cover you want
  • Your age, medical history and health status
  • The policy term

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.

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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.

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How much cover can we take out?

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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:

  • Director aged 16 to 39: up to 30x total remuneration
  • Director aged 40-49: up to 20x total remuneration
  • Director aged 50 or over: up to 15x total remuneration

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 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.

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Which providers offer director’s life insurance?

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Director’s life insurance is a relatively new product compared to conventional life insurance policies, but there are several providers that cater to limited companies, including the leading insurance companies. Examples of director life insurance providers include:

  • IG
  • Aviva
  • Legal & General
  • Scottish Widows
  • Zurich
  • Liverpool Victoria (LV)
  • Vitality
  • Royal London
  • Aegon

To find life insurance 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.

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How do I get the best deal for director’s life insurance?

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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:

  • Limited company directors
  • Consultants and contractors who provide services through a limited company
  • Small business employees who cannot access group premiums
  • Some charities and partnerships
  • Employees who pay high tax rates and want to save without impacting their lifetime pension allowance

Director’s life insurance is not available to sole traders.

What happens when you apply for director life insurance?

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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:

  • How old are you?
  • Do you smoke or have you smoked in the past?
  • How much cover do you require?
  • Do you have any underlying medical issues or pre-existing conditions?
  • How long do you want the policy to last?

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 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:

  • 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 insurance 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.

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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Jody Pearmain

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