Contractor Life Insurance

Contractor Life Insurance policies are available for those who have set up a limited company. Also known as Relevant Life Cover, they are available to those who have too few employees to qualify for a group policy. They offer peace of mind for contractors and a tax efficient way to leave a lump sum benefit for families.

 

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What Is Contractor Life Insurance?

Life insurance specifically for contractors is an insurance product – also known as Relevant Life Cover – is a tax-efficient way for contract workers to provide a predetermined tax-free lump sum, to a chosen beneficiary in the event of the policyholder’s death.

  • Life insurance can give you the peace of mind that should anything happen to you, your loved ones would be taken care of financially.
  • The amount the beneficiary receives depends on the level of cover you choose and can be specified to cover particular things, such as rent, mortgage or university fees.
  • Many policies will pay out the beneficiary payment early on the diagnosis of a terminal illness, where you are not anticipated to live more than 12 months.
  • A critical illness insurance policy can be added separately to offer additional cover, should you become ill or injured and become unable to work.

What Does Contractor Life Insurance Cover?

Relevant Life Insurance, as with regular individual Life Insurance, is designed to pay out a beneficiary lump sum on your death, or in some cases on the diagnosis of a terminal illness (when you have been predicted to live less than 12 months).

Most Relevant Life Insurance policies are Level Term policies. This means that the sum insured is continuous throughout the whole term of the policy. So if you were to die early on or towards the end of the term, your beneficiaries would receive the same pay-out.

Who Needs Contractor Life Insurance?

Life Insurance is not a legal requirement, but if you have anyone who relies on you financially, or a debt such as a mortgage, it is certainly something to consider. Think about how much your dependents would need to maintain their current standard of living if you were not there to provide for them. These costs may include your day-to-day bills, a mortgage or rent, school or university fees and more. If these costs cannot be covered by savings; then Life Insurance could be the answer. It can also be used for the purpose of leaving an inheritance behind, or to cover funeral costs or inheritance tax bills.

What’s The Difference Between a Group Policy and Contractor Policy?

Group Life Insurance policies are only available to bigger companies. Relevant Life Insurance is aimed at small businesses, either with a small number of employees, or even those with just one director. Such companies would not normally be eligible for a Group Life Insurance scheme.

What’s Different About Contractor Life Insurance?

When it comes to Life Insurance contractors have the opportunity to take out a tax-efficient policy to protect their family financially. Also known as Relevant Life Insurance, this is applied for and paid for by the small business, the policy is written into trust so it pays the benefit cash sum to your beneficiaries. This can also be applied to another employee, if the company is too small to take on a group policy. Normally the cost which is paid by the company is an allowable business expense and becomes part of the director or employee’s overall remuneration package.

How Much is Contractor Life Insurance?

Contractor Life Insurance premiums are based on the same underlying factors as for all Life Insurance:

  • The amount of benefit you wish your beneficiaries to receive (ie the cash sum that’s paid out on your death) Relevant Life Insurance allows you to insure a multiple of your remuneration – often up to 25 times.
  • The risk you pose of passing away (affected by your age, medical history, smoker status etc)
  • The length of term of the policy – how many years you would like to be covered for

The difference with the cost of Contractor Life Insurance is that it can offer significant savings over regular Personal Life Insurance because of tax liabilities. The premiums are paid for by the business as an allowable business expense, so gain corporation tax relief at 20%. They are not classed as a taxable benefit in kind, so are affected by Employee National Insurance contribution or Income Tax. The benefit is paid into a trust which is set up at the beginning of the policy, which keeps the benefit outside the business and therefore means it is not eligible for tax on a claim. The pay-out also does not form part of your lifetime pension allowance, which is the case for most group schemes.

The table below demonstrates the two scenarios and potential savings:

Scenario 1: A personal policy paid for out of the net of income taxed earnings, where the director or employee is in the higher tax bracket:

  Personal Cover
Monthly Premium £100
Employee National Insurance Contributions £3.45
Higher Rate Income Tax @ 40% £68.97
Gross Earnings Required £172.42

Scenario 2: A Relevant Life Insurance policy paid for by the company:A Relevant Life Insurance policy paid for by the company:

  Personal Cover
Monthly Premium £100
Employee National Insurance Contributions n/a
Higher Rate Income Tax @ 40% £20
Gross Earnings Required £80

As you can see the combined savings of £92.42 are significant in this example. However, we would always recommend discussing your own personal circumstances with your accountant.

Can I Include Critical Illness Cover to My Contractor Life Insurance?

HMRC only approves the tax benefits of Relevant Life Insurance to cover for life, not with Critical Illness added, so in short, this is not possible. Most policies would pay out on the diagnosis of a critical illness if you are not predicted to survive longer than 12 months. For sickness insurance, company directors could also consider Income Protection. Income Protection cannot be packaged together with Life Insurance in the same way Critical Illness cover can, but none-the-less it is relevant as another form of cover for illness and injury. Income protection is designed to cover any medical reason why you cannot do your job, and provides a percentage of your wages (before tax) while you are unable to earn. This is paid in the form of a monthly income, compared to a lump sum with Critical Illness.

Can I Get Contractor Life Insurance?

As long as you have a company structure to own and pay for the Life Insurance policy, you can make the most of Relevant Life Insurance. This includes a company where the director is the only member of staff. However, if you are a self-employed sole trader, or work under an umbrella company, you would not be able to get Contractor Life Insurance of this kind. You would still be able to take out a regular Individual Life Insurance policy though.

 

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