Protecting our loved ones is one of the main reasons we get up and go to work in the morning. The challenge when you work for yourself as a contractor however, is that you lose the benefits that ‘traditional’ employees provide which ensure that we can protect our loved ones in various scenarios.
These benefits include sick pay and death-in-service. To ensure your loved ones are protected in the worst case scenario, you may want to take out a life insurance policy.
As a contractor and director of your own limited company, it is worth considering Relevant Life Insurance over regular life insurance as it is highly tax efficient, and could save you money.
What exactly is Relevant Life Insurance?
Relevant Life Insurance ultimately does exactly what standard life insurance does, paying out a lump sum to your chosen beneficiaries if you were to die. The biggest difference between the two is that Relevant Life Insurance, unlike standard life insurance, is tax efficient and can be paid through your limited company, saving you money.
Five facts about Relevant Life Insurance
1. Relevant Life Insurance is taken out by the LTD company, not the individual contractor
The monthly life insurance premium is paid for by the company and will cover a particular employee, such as yourself. If you were to unfortunately die, a lump sum will be paid to your beneficiaries.
2. It is not treated as a benefit-in-kind
Relevant Life Insurance is not treated as a benefit-in-kind; that means you won’t lose any of your tax free allowance. It is considered a company expense, so your company will enjoy the corporation tax relief on the premiums.
3. The payout is free from income tax and, usually, inheritance tax
As well as being tax efficient to pay for, Relevant Life Insurance is tax efficient when paying out. As there is no income tax or inheritance tax liabilities (when placed into trust correctly), your family will receive the full payout if anything was to unfortunately happen to you.
4. It does not count toward your lifetime allowance for pensions
A benefit of taking out a Relevant Life Insurance policy is that it does not count toward your pension lifetime allowance. You have a limit of £1.03 million (for the tax year 2018/19) that you can accumulate into a pension pot before you start paying tax. Lump sum payments from a pension scheme are included in the lifetime allowance however, payments made from Relevant Life Insurance are not.
5. No payout if the policy is cancelled
It is important to understand that, unlike other investments, there is no payout if the policy is cancelled. As it is a form of life insurance, the policy will remain for as long as your limited company keeps up the monthly payments, with the conditions of the policy not being breached. If you choose to stop paying the monthly fee, then the cover will stop and there is no surrender value.
You can find out more in our general guide to relevant life insurance.
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