Permanent employees often have death-in-service cover as part of their contract of employment with typically ‘3-4 times your salary’ as the benefit, but for contractors who are often the only person who works in their company, there has been little scope to provide similar benefits, until now.
Often a contractor or freelancer who runs their own limited company would take out a personal life insurance term policy (payable on death), where the premiums are paid for out of taxed income, and the policy is held in his or her own name.
However, it is now possible for contractors to take out a stand-alone, death-in-service policy which gives life insurance cover on the life of the contractor/director or on the life of any other employee (e.g. an administrator, who works for the company).
This new form of protection is called a ‘relevant life policy.’ It is set up in the name of the company, so that the company owns the policy and the life assured can be the director or any other employee.
The premiums are paid by the company and the benefit can be paid to an individual (spouse/ loved one) or even a charity, tax free. Furthermore, the policy premiums are normally classed as a tax deductable expense for the business so in effect, a contractor who is a limited company director can get corporation tax relief on the premiums.
- The contractor/employee can insure themselves for up to 15 times their combined salary and dividend income.
- The policy has to be level term cover and has to be placed in a relevant life trust completed at the same time as the application.
- The policy can run for a maximum of 40 years and the end date of the policy must not extend beyond age 75.
- There can be no surrender value to the policy.
What does a stand-alone single life policy do?
The aim of the policy is to provide a lump sum benefit on the death of an employee. This removes the need for the company to set up a registered group life scheme. The policy is designed to meet the requirements of a single life relevant life policy under S393B(4) (b) of the Income Tax (Earnings and Pensions) Act 2003.
Who are relevant life policies aimed at?
The policy is aimed primarily at two groups:
- High-earning employees who have substantial pension funds and do not want their death in service benefits to form part of their lifetime allowance.
- Small businesses that do not have enough eligible employees to warrant a group life scheme. (Relevant life policies can also be used by Directors of the company.)
“New and existing contractors can enjoy the same safety net when contracting as they did when in employment and they can be confident that their dependants will be financially secure should the worst happen.”
Provided the arrangement meets the criteria below, a relevant life policy has a number of advantages:
- The benefit will not form part of the employee’s lifetime pension allowance.
- The premiums paid will not form part of the employee’s annual allowance. (The annual allowance is the amount that can be contributed by, or on behalf of, an individual to any registered pension scheme with the benefit of tax relief.) The employee is therefore still able to make full use of their annual allowance to make contributions to a registered pension scheme.
- Premiums paid by employers are not normally assessable on the employee as a benefit in kind and are therefore not subject to income tax.
- Premiums paid by employers are not normally assessable for employer or employee National Insurance contributions.
- The premiums can normally be treated as an allowable expense for the employer in calculating their tax liability.
- Provided the benefits are payable through a discretionary trust, in most cases the benefits are paid free of inheritance tax as the payment is not part of the employee’s estate.
This form of insurance is ideal for contractors who run their own limited company (or employees of the company). Even if you already have a personal life insurance policy set up, you can consider the merits of comparing this to a death in service life insurance policy.
N.B. Death in Service cover as mentioned above should not be confused with Key Man Insurance or Shareholder protection. The latter two are different policies with different terms.
By Paul Cleworth,
Financial Planner and Director of Wealth Matters Ltd
Wealth Matters have been working with contractors for over eight years and offer a cost free and obligation free face-to-face meeting for contractors. See our partner page for more information.
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