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:
