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Life Cover for Company Contractors (known as a Relevant Life Policy) is a way of providing death-in-service benefits on an individual basis no matter how small your business is. They are not classed as a ‘benefit in kind’ so no tax is payable on the premiums. In most cases the benefits can be paid free of inheritance tax provided the benefits are payable through a discretionary trust.

If you’re a contractor and you already have life insurance in place to protect your family, you could be paying more tax than you need to.

What are the benefits?

• Although the company pays the premiums, they are not normally assessable to income tax on the employee as a benefit-in-kind. This can be a significant saving, particularly for a higher-rate taxpayer
• Unlike a registered group scheme, the benefit will not form part of the employee’s annual or lifetime pension allowance

What are the advantages of using a discretionary trust?

• There are restrictions as to whom the benefits of a Relevant Life Policy can be paid, but the use of the trust is the most practical way of ensuring these restrictions are met. The beneficiaries who could be included are usually family members and dependents
• Having benefits paid through a trust ensures they cannot be taxed as part of the company’s trading income, nor do they form part of the company’s assets
• The trust is discretionary, allowing trustees to be flexible as to whom they pay benefits. However the employee can advise the trustees of his or her intentions by completing a nomination form. Although this is not legally binding on the trustees, it helps to guide them. The trustees will normally be the directors of the company
• Using a trust also ensures that in most circumstances benefits are paid free of both income tax and inheritance tax
• The maximum cover differs across insurers: for example, Bright Grey offer a figure up to 15 times the employee / director’s remuneration. This can include salary, regular dividends paid in lieu of salary and any benefits in kind

Are there any limits to the cover I have?

• The legislation does have some limits to qualify for the tax concessions, and to ensure these are met, it requires that:
• The cover must be paid in a single lump sum before the age of 75
• Only Death & Terminal Illness benefits can be provided
• Benefits must be paid through a discretionary trust
• Beneficiaries are normally restricted to family members and dependents
• The maximum amount of cover allowable can depend on your remuneration and age

Who are relevant life policies suitable for?

• Contractors that would like their company to pay for their life cover and offset the premiums against corporation tax
• Small businesses that do not have enough eligible employees to warrant a group life scheme
• Directors of small limited companies that may be thinking of putting Key Person cover in place so that their company can pay the premiums on their cover
• High-earning employees or directors who have substantial pension funds and do not want their benefits to form part of their lifetime allowance

They are not suitable for the self-employed or equity partners, although their employed staff could be covered.

Executive Income Protection operates in a very similar way to Personal Income Protection, providing a regular income if the person insured is unable to work due to illness or injury.

The main difference between the two types of policy is that Executive Income Protection can cover up to 80% of the individual's income, whether from wages or dividends or both, whereas most standard policies typically only cover up to 60%.

As such, it is an attractive benefit for high-earning small business owners and contractors.

The cost of the premiums is determined by how much cover is required, the age of the individual to be covered, any existing or past health conditions, what their current role entails, how long the cover is to last, and how long they are prepared to defer the first payment.

The premiums are paid by the company and are tax-deductible, which is an additional saving compared to personal policies.

Along with other benefits available, Executive Income Protection can be a valuable component of an overall financial plan, especially those with high incomes and significant financial responsibilities.