A Director 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, not least the fact it's a tax-deductible death.
Key facts about Director Life Insurance:
- Also known as Relevant Life Insurance or Relevant Life Cover, it's a death-in-service benefit for smaller businesses instead of a group life scheme.
- Director Life Insurance is owned and paid for by a limited company, introducing several tax efficiencies.
- Insurers will usually allow you to cover up to 30x of your total annual remuneration, including both PAYE and dividends.
- Relevant life insurance policies are tax-efficient and can save higher-earning directors up to 49% compared to a personal life insurance policy.
- A specialist trust should always be set up with a Relevant Life Insurance policy 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 Insurance policy over personal cover is the tax savings it provides, so before we go too much further, let us explain precisely what they are.
Directors' Life Insurance premiums are 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 bill.
Relevant life insurance isn't a P11D benefit in kind, making it income tax-friendly
As relevant life insurance isn't a P11D benefit, 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 deceased's estate, making it a tax-efficient company life insurance policy for everyone.
So inheritance tax isn't levied on the payout?
That's correct. As the relevant life 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 insured individual's death. In addition, most director policies will also payout if the insured is diagnosed with a terminal illness with less than 12 months to live.
Similarly to personal plans, some providers allow you to choose between level, increasing or decreasing cover, depending on your requirements.
Can I include critical illness cover?
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 that protects you and your income from sickness, we'd generally suggest looking at Executive Income Protection Insurance (directors' income protection insurance).
Relevant life insurance is a reasonably new type of business protection explicitly designed for small businesses, their employees and directors who haven't been able to access a group life insurance scheme because they have too few employees.
Limited companies, charities and partnerships can all take out a relevant life policy for their directors and employees, but unfortunately, sole traders cannot.
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.
Relevant life insurance is especially suited to:
- Company directors (with their own limited company)
- Contractors and management consultants who deliver their services via a limited company
- Employees of small businesses where a group life insurance scheme might not be possible
- High-earning employees who want additional life insurance options that don'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 like personal life insurance, the cost of a company director's policy will vary based on various factors, some of which you will have control over and others you won't. These include:
- 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, the higher the cost.
By way of example, let's say you bought personal cover 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 relevant life insurance 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 significant saving of over 53%!
Of course, how much you save will depend on your circumstances, but as you can see, the potential is significant.
Another benefit of buying life insurance through a limited company for higher earners is that relevant life insurance isn't counted towards their pension lifetime allowance.
To explain that further, there's a limit (currently £1,073,000) that you can build your pension savings up to before a tax charge is due. Any lump-sum payments under a registered scheme, such as a group policy, contribute to that "pot", and any payments to the estate that exceed the limit are taxed at 55%. Therefore, relevant life insurance is a brilliant way for high earners to opt-out of a group life insurance plan.
There are many providers of Director Life Cover currently in the market. Some provide better benefits, and others will cover you for higher sums or multiples of remuneration.
To find the best cover 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:
- Aegon
- AIG
- Aviva
- Legal & General
- Liverpool Victoria
- Royal London
- Scottish Widows
- Vitality
- Zurich
Business Protection Hub is an independent and impartial company insurance expert. We work solely with five-star rated FCA approved advisers, who can save you time and money by working with you to find the best insurance for your company. We don't operate huge call centres and prefer to offer a high-quality service that maximises your policy benefits and gives you maximum cost and tax savings.
Our advisers are used to working with busy small business owners and can communicate with you via email, telephone or video calls. We aim to make the process of finding the best business protection insurance as simple as possible.
Request a comparison quote or get in touch
Whether it is company life insurance, or income protection, we can help. Simply request a comparison quote or drop us an email and one of our professional team will be right back to you.
Frequently asked questions
Is Directors' life insurance a benefit in kind?
No, life insurance for directors, also known as Relevant Life Insurance, isn't a P11D benefit in kind, meaning it won't impact your income tax or national insurance contributions. This is dissimilar to group life insurance, which is usually seen as a taxable benefit.
Can my limited company pay for my life insurance?
Yes, your limited company can pay for your life insurance rather than you taking out personal life cover. There are several advantages of doing so, not least that it's tax-deductible and classed as an allowable business expense.
In addition, if the policy is written into a trust when it's set up, beneficiaries, i.e. the deceased's family members, won't have any inheritance tax to pay on the proceeds - giving a tax-saving all around. Finally, as the lump sum is delivered into the trust, it bypasses probate, meaning your loved ones get the much-needed funds as soon as possible.
Is director life insurance an allowable business expense?
Yes, company life insurance plans that cover a director's or an employee's life are an allowable business expense, so it'll reduce your corporation tax bill and provide several other significant savings.
Can I get a relevant life policy?
Company directors, contractors and management consultants who have limited companies, employees of small businesses and high-earning employees of small businesses can all get a relevant life plan. The only significant exclusion is sole traders, who currently can't get a policy.
Do you charge anything for the service you provide?
No, we don't. The services our advisers and we provide are completely free of charge.
