Why take out a Relevant Life Policy as a Contractor?

As a contractor, managing your finances and securing protection for your loved ones is very important. One of the most safe and secure ways to do this is through Relevant Life Insurance. This type of cover offers significant tax advantages, making it an attractive option for contractors across the country who are self-employed but operate through a limited company.

A Relevant Life Policy offers a tax-efficient and cost-effective solution tailored to the business needs of the company and contractor. It allows you to provide life insurance cover for yourself through your limited company, without having to pay premiums from your personal income.

Find out why getting Relevant Life Insurance could be a smart choice as a contractor and how it can secure you both personal financial protection and tax savings. You’ll also find out how it compares to Personal Life Insurance and the tax implications.

What is Relevant Life Cover?

Relevant Life Cover is a type of life insurance designed specifically for employees, company directors and contractors. No matter your job role, this type of insurance is only available if you work for a limited company.

This type of insurance is designed to pay a lump sum to a contractor’s or employee’s beneficiaries (typically family members) should the insured worker unexpectedly pass away. Some insurers also offer Critical Illness cover as an add-on, which covers the employee or contractor should they become terminally ill and have less than 12 months to live.

The insurance money from Relevant Life Insurance can be used to cover the loss of income due to the loss of the employee or contractor. The money from Critical Illness cover can also be used to help cover the cost of medical care for the employee or contractor.

How does it work for Contractors?

If you’re a contractor operating through a limited company, a Relevant Life Insurance policy allows you to take out tax-efficient life cover through your business. You can use this cover rather than paying for Personal Life Insurance from your post-tax income. The policy is set up and funded by the limited company, rather than from your personal bank account. The premiums for this insurance are paid pre-tax, which makes Relevant Life cover more tax-efficient than Personal Life Insurance, which is paid for from net salary.

Premiums are usually classed as an allowable business expense, which reduces the company’s taxable profit. In addition, Relevant Life Insurance isn’t considered a P11D benefit in kind. This means that unlike salary or dividends, premiums are not taxed as income for you.

You can get tailored Relevant Life Insurance to suit the company, the contractors and employees. The maximum coverage for each insured contractor or employee is typically based on their age and salary. The insurance is typically a multiple of the person’s salary. For example, contractors or employees aged from 17 to 49 year may have up to 25 x remuneration, while 50- to 59-year-old workers may have up to 20 x remuneration. Contractors or employees over 60 years old may have a maximum of 15 x remuneration.

If the insured contractor passes away while employed by the company, their beneficiaries will receive a lump sum payment. This money can be used to cover the loss of income from the death of their loved one.

Why is Relevant Life Insurance for Contractors ideal?

There are many Relevant Life Insurance tax benefits if you fully understand the cover. It’s also a great way for the business to provide cost-effective personal life cover to contractors while maximising business savings for the limited company. Unlike traditional life insurance, which is paid from post-tax income, Relevant Life Cover is funded by the business, making it a smarter financial choice.

The premiums for Relevant Life Insurance are paid for by the business and the policy is owned by the company. This type of insurance allows businesses to provide life insurance coverage for their contractors, employees or directors as a tax-efficient benefit. Companies can get Corporation Tax relief on the premiums, which reduces the company’s taxable profits. Relevant Life Insurance isn’t considered a P11D benefit-in-kind, which means the employee or contractor doesn’t have to pay Income Tax on it.

The employer and contractor don’t have to pay National Insurance contributions on Relevant Life Insurance. When the insurance is placed in a discretionary trust, the insurance money is usually free from Income Tax & Inheritance Tax too. Relevant Life Insurance doesn’t reduce your pension lifetime allowance, which makes it a great option for high earners who are close to the allowance limit.

In many cases, Relevant Life Insurance offers higher cover than Personal Life Insurance, which provides better financial security for the named beneficiaries. If you stop contracting or switch jobs, the policy can often be transferred into a personal plan, which ensures you stay fully covered, no matter where you work.

What Should Contractors Consider When Taking Out a Relevant Life Policy?

Despite the many benefits of Relevant Life Insurance for contractors, there are several factors to consider too. For one, Relevant Life Insurance is only available if you’re operating as part of a limited company; sole traders and partnership businesses can’t take out this insurance. The company and contactor must also be UK-based to be eligible for this type of insurance. There may also be an age limit on the insurance. Many insurance companies don’t offer Relevant Life Insurance to employees or contractors over the age of 75 due to the increased likelihood of the employee developing health issues.

If you want to enjoy the tax benefits of Relevant Life Insurance, the policy must be set up in a discretionary trust. This can add an extra administrative burden, as can providing detailed medical underwriting should the insurer request it.

In most cases, Relevant Life Insurance for contractors only includes Life Cover. This type of cover insures contractors or employees should they unexpectedly pass away. However, some insurers also offer Critical Illness cover, which will cover you should you have a heart attack, stroke or another long-term and serious illness that leaves you unable to work.

From the perspective of the business, the insurance doesn’t directly benefit the company. Instead, the insurance money directly benefits the employee’s or contractor’s beneficiaries. However, the business can indirectly benefit from the cover, thanks to the tax-advantages. Relevant Life Insurance for contractors or employees can also form part of the company’s benefits package, which can help attract and retain top talent.

It’s worth remembering that the maximum cover for Relevant Life Insurance is typically 15x to 25x your salary, depending on your age and health. However, if your declared salary is low, your cover may be lower than expected. This could mean beneficiaries miss out should the worst happen.

You can use our helpful Relevant Life Insurance calculator to help you compare the net cost of a Personal Life Insurance policy against Relevant Life Insurance. To use the calculator, you’ll need the annual premium of your current Personal Life Insurance, along with the Corporation Tax rate and your annual salary. You’ll also need to input the coverage amount you need. The calculator will quickly the figures you’ve inputted and use them to estimate the potential tax benefits of choosing Relevant Life Insurance over Regular Life Insurance. You can use the estimates to help you find the right insurance policy for your business and financial needs.

Why Contractors Should Take Out Relevant Life Insurance

Relevant Life Insurance for contractors is a tax-efficient and cost-effective way for directors and contractors operating through a limited company to secure personal life cover. Instead of paying for life insurance from post-tax income, contractors can have their limited company cover the premiums. This reduces taxable profits and means the contractor doesn’t have to pay Benefit-in-Kind tax.

The company doesn’t have to pay Corporation Tax, Income Tax or National Insurance contributions on the premiums. As long as the insurance is put in a discretionary trust, the lump sum is also free from Income and Inheritance Tax. Relevant Life Insurance also has no impact on the contractor’s Pension Allowance, which is great if you’re near the allowance limit.

It’s important to remember that this type of insurance is only suitable for limited companies: Relevant Life Insurance for contractors isn’t available to sole traders or partnerships. The insurance also only covers death and terminal illness, so you may need a separate critical illness policy.

If you’d like to get a free quote, you can fill in our online form. We’ll be able to provide you with the best insurance cover at the best prices to suit your financial and business circumstances. You can contact us by phoning 020 7112 8844 or by emailing info@mykeymaninsurance.com. A member of our friendly team will be more than happy to answer any questions you may have and help find you the best Relevant Life Insurance for contractors.