The Essential Guide to Relevant Life Insurance for Directors: Secure Tax-Efficient Protection for Your Business

Relevant life insurance for directors offers a specialized, tax-efficient solution for company owners and key employees, delivering a life insurance benefit through the business. For directors of limited companies, this type of insurance is an attractive option, combining financial security with significant tax savings. In this blog, we’ll unpack how relevant life insurance for directors works, why it’s a smart choice, and what advantages it brings for both companies and directors alike.

What is Relevant Life Insurance?

Relevant life insurance is a policy offered by an employer that provides life cover for an employee—often a director—within a limited company. It functions like a traditional life insurance policy, offering a lump-sum payout to designated beneficiaries in the event of the insured person’s death. However, unlike traditional life insurance policies, relevant life insurance is highly tax-efficient, with premiums typically paid by the company and classified as a business expense.

This policy type is particularly appealing for directors because it allows them to have life insurance that doesn’t count as a taxable benefit in kind. It’s structured to comply with HMRC guidelines, ensuring that neither the company nor the director faces additional tax charges.

Key Benefits of Relevant Life Insurance for Directors

1. Tax Efficiency: One of the primary benefits of relevant life insurance for directors is the tax savings. As the premiums are paid by the company, they are usually treated as a tax-deductible business expense. This is a great way for directors to receive life insurance cover without incurring personal tax charges.
2. No Benefit-in-Kind Tax: Relevant life insurance is structured so that it is not considered a benefit in kind, meaning directors can enjoy life cover without it impacting their personal tax situation.
3. Attracting and Retaining Talent: Offering relevant life insurance can be an attractive benefit for senior employees and directors. It demonstrates that the company is invested in the well-being of its key personnel, making it easier to attract and retain top talent.
4. Flexible Coverage: These policies are typically highly customizable, allowing directors to choose the level of coverage that aligns with their financial needs and the company’s budget.
5. Inheritance Tax-Free: The benefit paid out under a relevant life insurance policy is generally exempt from inheritance tax when written in trust, ensuring that the insured’s beneficiaries receive the full amount.

Who Should Consider Relevant Life Insurance?

Relevant life insurance is designed for directors and high-earning employees of limited companies who are seeking personal life cover paid for by their company. It is especially appealing for:

• Company Directors: As a tax-efficient solution, relevant life insurance enables directors to secure personal life cover without affecting their individual tax burden.
• High-Earning Employees: Companies looking to offer competitive benefits packages to high-level employees may consider relevant life insurance to incentivize their workforce.

If you are a sole trader, partner in a business, or contractor, you may not be eligible for this specific type of insurance. However, there are other types of policies that can provide similar benefits within a different tax framework.

How Does Relevant Life Insurance Work?

The mechanics of relevant life insurance are straightforward: the company pays premiums, and upon the insured person’s death, the policy pays a lump sum to their chosen beneficiaries. Here’s how it works in detail:

1. Premiums Paid by the Company: The premiums for relevant life insurance are paid by the limited company, not the individual director. This setup allows the company to treat the payments as a business expense, potentially reducing its taxable profit.
2. Trust Arrangement: Relevant life insurance policies are usually written into trust, which ensures that the payout goes directly to the chosen beneficiaries rather than forming part of the director’s estate. This trust arrangement helps avoid inheritance tax, allowing beneficiaries to receive the total amount tax-free.
3. Tax Relief: Because the premiums are considered a business expense, the company may be eligible for corporation tax relief on the premium payments. This aspect adds another layer of tax efficiency for the business.

How Relevant Life Insurance Saves Money

Relevant life insurance for directors is not only an essential benefit but a tax-saving strategy. Here’s how directors and their companies benefit from these tax efficiencies:

• No Personal Income Tax or National Insurance Contributions: Because relevant life insurance is not treated as a benefit in kind, it doesn’t attract income tax or national insurance contributions for the director.
• Corporation Tax Savings: The company may be able to claim corporation tax relief on the premiums, as they are usually classed as an allowable business expense.
• Reduced Inheritance Tax: As relevant life insurance payouts are made through a trust, they don’t become part of the deceased’s estate, thus avoiding inheritance tax.

For directors, these features make relevant life insurance a cost-effective and efficient solution for securing financial protection for loved ones while reducing tax obligations for both themselves and the company.

Setting Up Relevant Life Insurance for Your Business

Setting up relevant life insurance is relatively straightforward and can usually be done through an insurance broker or financial advisor. Here’s a step-by-step guide to getting started:

1. Consult a Financial Advisor: A professional advisor can assess your needs and recommend coverage options that align with your company’s financial position.
2. Choose Coverage Amount: Decide on the level of cover. This amount is usually a multiple of the director’s salary (e.g., five or ten times their annual income).
3. Select Beneficiaries and Set Up the Trust: When you establish the trust, designate the beneficiaries who will receive the policy’s payout. This is critical, as the trust ensures that the payout goes directly to the beneficiaries.
4. Underwriting Process: Like most insurance policies, relevant life insurance requires underwriting. The insurance provider may ask the director to provide information on health, lifestyle, and medical history to assess risk.
5. Finalize the Policy and Begin Coverage: Once the underwriting process is complete and the trust is set up, the policy will be active, and the company will begin paying premiums.

Common Misconceptions about Relevant Life Insurance

Some misconceptions might deter directors from exploring relevant life insurance. Here are a few clarifications:

• It’s Only for Large Companies: Relevant life insurance is often used by small to medium-sized businesses, especially those with limited budgets for employee benefits.
• It’s a Complex Process: Setting up relevant life insurance may seem complex, but with the assistance of a qualified advisor, the process is quite straightforward.
• Only Directors Benefit: While it’s often used for directors, relevant life insurance can be offered to other key employees, making it a versatile option for companies looking to provide additional benefits.

Is Relevant Life Insurance Right for You?

Relevant life insurance is ideal for directors of limited companies who want to secure life cover in a tax-efficient manner. If you are a director looking for cost-effective ways to protect your family while benefiting from corporate tax efficiencies, relevant life insurance could be an excellent choice.

Before making a decision, consult a financial advisor to ensure that this insurance product fits within your broader financial planning strategy.

Conclusion

Relevant life insurance for directors stands out as a highly tax-efficient, cost-effective way to provide essential life cover for directors and key employees. With benefits such as corporation tax savings, no benefit-in-kind implications, and inheritance tax advantages, it’s a valuable tool for companies aiming to attract, retain, and protect top talent. Consider consulting with a financial advisor to explore if relevant life insurance aligns with your business’s financial goals and personal coverage needs.

By understanding the benefits and workings of relevant life insurance, directors can make informed choices that provide security for their families and tax advantages for their businesses.