A company director's life insurance policy is similar to a personal one in that it pays out a lump sum to your chosen beneficiaries in the event of your death. The difference is who pays for the policy, with directors having the option to pay via their company, rather than out of their own pocket. This type of policy is called 'Relevant Life Insurance' and it comes with a range of attractive cost-saving benefits.
Key facts about Directors’ Life Insurance:
- Also known as Relevant Life Insurance or Relevant Life Cover.
- Director's Life Insurance is owned and paid for by a limited company which introduces a number of tax efficiencies.
- Insurers will usually allow you to cover up to 30x of your total annual remuneration, including both PAYE and dividends.
- Relevant life policies are tax-efficient and can save higher earning directors up to 49% in comparison to a personal plan.
- A specialist trust should be set up with all Relevant Life Insurance policies for the benefit to be paid into to avoid any tax issues with the claim.
For many directors, the lure of taking out a Relevant Life policy over a personal one is the tax benefits it provides, so before we go too much further, let us explain exactly what they are.
Directors’ Life Insurance is tax deductible
The premiums a company pays for a Director's Life Insurance policy are classed as an allowable business expense, meaning they are subtracted from your profits, thereby reducing your corporation tax liability.
Relevant life insurance isn't a P11D benefit in kind
As relevant life insurance isn't a P11D benefit in kind, company directors needn't pay any additional income tax or make extra National Insurance contributions. Equally, the company won't need to pay employer National Insurance contributions either.
Writing the benefit into a trust is essential
Central to a director's policy being tax efficient is writing the benefit (payout) into a trust. By doing this the payout bypasses both the business and the estate of the deceased, making the plan tax-efficient for both the company and the family of the individual.
So inheritance tax isn’t levied on the payout?
That's correct. As the insurance policy will be written into a specialist "relevant life trust", claims are paid promptly to the beneficiary via the trust, negating inheritance tax and avoiding delays with probate.
A director's life policy is designed to pay out a cash lump sum in the event of the death of the insured individual. In addition, most policies will also pay out if the insured is diagnosed with a terminal illness with less than 12 months to live.
Similarly to personal policies, some providers allow you to choose between level, increasing or decreasing cover, depending on your requirements.
Can I include critical illness cover?
Currently, you can't include critical illness cover on a relevant life cover policy as HMRC hasn't approved the tax status of relevant life cover with critical illness cover. As such, many of the tax-efficiencies, like it being an allowable business expense and deductible from profits, wouldn't apply.
If you're looking for insurance which protects you and your income from sickness, then we'd generally suggest looking at Executive Income Protection Insurance.
Limited companies, charities and partnerships can all take out these policies for their directors and employees, but unfortunately, sole traders are unable to. In addition, equity partners, i.e. shareholders in a limited company but aren't employed by the business can't take out a policy either.
This type of life insurance is especially suited to:
- Limited company directors
- Contractors and management consultants who deliver their services via a limited company
- Employees of smaller companies where a group death-in-service scheme might not be possible
- High-earning employees who want additional life insurance that doesn't count towards their annual or lifetime pension allowance.
One of the significant benefits of a relevant life policy over a group scheme is that you can, with some insurers, get cover for up to 30x your annual remuneration, depending on your age. Although it will vary from provider to provider, you can expect to be able to get roughly the following amount of cover based on your age:
- Age 16-39 = 30 x total remuneration
- Age 40-49 = 20 x total remuneration
- Age 50+ = 15 x total remuneration
Much the same as personal life insurance, the cost of a company director’s policy will vary based on a range of factors, some of which you will have control over and others you won't.
- Your Age - the older we are the more likely we are to pass away so as you might expect, the cost of a new policy will be more for an older person.
- The amount of cover required - the amount of cover you choose to take, alongside whether it's on a level, decreasing or increasing basis will play a significant role in the cost of your policy.
- Whether you're a smoker - as smokers are more likely to die prematurely, insurers tend to charge higher premiums to cover them.
- Your medical history - If you suffer from any pre-existing conditions your insurer may increase your premiums to account for them.
- Length of policy - the longer you want the policy to run for the higher the cost.
By way of example, let's say you bought a life insurance policy personally that costs £120 per month. As you're buying it out of your own pocket, you will have already paid taxes and National Insurance contributions on the money you're using to pay the premiums. That means a higher-rate taxpayer would have needed to earn £226.42 within the company to generate enough to cover the £120 monthly premium.
Conversely, if you take out a relevant life cover policy instead of personal life insurance, you can sidestep income tax and National Insurance and would only need to generate £97.20 to pay for the equivalent policy. That's a saving of over 53%!
Of course, how much you save will very much depend on your own circumstances, but as you can see, the potential is significant.
For higher earners, another benefit of buying life insurance through a limited company is that relevant life insurance isn't counted towards your pension lifetime allowance.
There are a number of providers of Directors’ Life Insurance currently in the market. Some provide better benefits and others will cover you for higher sums or multiples of remuneration. To find the best life insurance policy for you, we always recommend speaking to an independent broker, simply request a quote and one of our team will be in touch.
Relevant life insurance providers:
- Legal & General
- Liverpool Victoria
- Royal London
- Scottish Widows
Business Protection Hub is an independent and impartial company insurance expert. We work solely with 5* rated FCA approved advisers, who can save you time and money by working with you to find the best insurance for your company.