There is a better way for contractors and freelancers to pay for their life insurance. It’s called a “Relevant Life Policy” and is designed with limited company business owners in mind.
It’s different from standard life cover, which is often paid after tax. But as a small business owner, you can use your premiums against your tax bill.
No one likes paying for something they’re not going to see the direct benefit of. In a real sense, Relevant Life Insurance crushes that mindset, making you feel even better about protecting your family.
How does Relevant Life cover work?
The first thing to know is that you pay your premiums through your limited company. They go into a discretionary trust and accumulate over your work life.
If you die before you’re 75, your survivors receive a lump sum from your company. This way, your bequest is free from both inheritance and income tax when it’s paid.
If you survive past the age of 75, the cover ends. There is no cash value, as with most life cover policies. If you’re paying after tax, it’s easy to see why this type of cover grates.
That’s where Relevant Life comes into its own. As the premiums are not classed as income, there is no associated NICs or income tax to deduct. They are, for all intents and purposes, a business expense.
What does that mean in figures?
The maximum you can insure your life for is twenty times your annual income. Unlike other policies, ‘income’ can include dividends as well as your nominal salary.
Whatever you set aside in your Relevant Life fund will not count towards lifetime pension contributions, either. With the Government reducing our lifetime allowance, this is a significant advantage.
So, let’s say, for example, your life cover costs £125 pcm. For a standard policy after tax, in round figures, you’d have paid:
- 2% Employee NICs (£4.30);
- 14% Employer’s NICs (£29.75);
- 40% Income Tax (£86.20);
- the contribution itself (£125).
Your total cost for £125 worth of cover is therefore £245.25. But, yes. You’d then deduct corporation tax at 20%, giving you a final cost of £196.20.
Now, what would happen with an equivalent Relevant Life policy?
As the payment is an expense, there is no NICs or income tax to add to the total. Your only cost is the £125 contribution itself. Then, when you deduct the 20% corporation tax, your final cost is £100.
That’s almost half the cost for the same cover, just by channelling it through your company. This is why limited company owners rip your hand off when you explain how little it could cost to leave their dependants with no money worries.
This is not jiggery-pokery. The policy is the result of some astute people sitting down and working out what matters for contractors.
Keyman insurance only did half the job. Traditional group policies were inaccessible. Relevant Life was the answer because it’s, well, relevant for the independent professional.
Call us or request a call back to talk about your level of cover. You – and your family – will be a lot better off for it, both now and in the long run.