When moving to the contracting world from employment one of the benefits that individuals lose is their life insurance policy or death in service plans. Many contractors take out new life insurance or critical insurance cover (which I would strongly recommend), however taking out a Relevant Life Insurance policy offers great benefits.
This policy is a life insurance policy that is taken out by the company rather than the individual and paid directly from the company, thus attracting significant tax relief.
What is a relevant life insurance policy? This is a life insurance policy that can pay out up to 15 times your combined salary and dividends to family members after your death (the equivalent of a death in service benefit). This could work out as much as £1m for someone on a day rate of £300. It is useful to note however that the only beneficiaries that can be stipulated are family members or charities.
So to summarise, benefits are as follows:
- Relevant Life Insurance policies are like a death in service benefit that pays out to the contractors beneficiaries in the event of their death.
- The policy is taken out by the company rather than the contractor so is therefore a valid tax deductible expense and is therefore tax efficient. And as they are paid by the company not the individual there is no P11D benefit in kind charge.
- The lump sum can be worth up to 15 times the salary and dividends of a contractor.
- The payout is free from income tax and inheritance tax for the contractors beneficiaries.
- The relevant life policy is only a death in service benefit, not criticial illness or income protection insurance, these should be taken out separately. There is also no surrender value to the policy if cancelled.
I would recommend taking professional advice from a financial advisor to receive the most up to date details on the best policy for your company.
