A Guide To Business Owners Life Insurance
Understanding Business Owner’s Life Insurance
Business owner’s life insurance is easy to forget with so many things to consider as a business owner. One of the driving reasons why we run our own business is so that we control the happiness of our families and our futures. While we are alive, we can control this to a degree, but what if the worst were to happen? How would this affect the happiness of our families? This is where business owner life insurance is essential.
Why Business Owner’s Life Insurance is Vital
Many of our clients are the main breadwinner for their family, as well as a business owner. This means that their income and the income of the business is essential. In the event of death, this income needs to be replaced and the best way to do this is via a business owner’s life insurance policy.
The great news is that there is a specific business life insurance policy called relevant life insurance that is specifically designed for business owners and offers both corporation and income tax relief, making it incredibly tax efficient while providing essential cover.
Business Owners and Relevant Life Insurance
By far the most popular product we sell to business owners is relevant life insurance policies. They are tax-free on the way in and tax-free on the way out, as your family will pay no inheritance tax. As long as the policy is left in the trust, the lump sum payment will be paid to the family on a tax-free basis.
Business Income Protection
Life insurance is can be hugely beneficial for your inheritors if you die or become critically ill. However, what if you simply have an accident and are unable to work for a period of time? Your income would drop, but how would you continue to pay your bills? That is where executive income protection comes in alongside business owner’s life insurance.
This unique policy pays your business 80% of your previous income, both from PAYE and dividends, so that you can continue to pay yourself a salary while you recover. The even better news is the business pays the premiums, offers corporation tax relief and income tax relief.
On average, this can save you 62% as a higher rate taxpayer compared to the same cover paid for personally.
As well as insuring the business owners own income, you can also insure the income they might pay to their spouse from their business. It is common that a business owner might pay income to both themselves and their partner, therefore, if they were unable to work, there would be a drop in income for both parties. Executive income protection reduces this risk, but insures both incomes within one policy.
Understanding Business Owner Life Insurance Add-On Benefits
All business owner life insurance policies come with a range of add-on benefits that you might want to consider:
Terminal Illness Cover
Offered with all relevant life policies, terminal illness cover pays the lump sum benefit out prior to death, as long as you have been diagnosed with a terminal illness. The purpose is to move the payout up so that you have time to make arrangements prior to death. It can also be added to other business life insurance policies.
Critical Illness Cover
Critical illness generally covers around 80 different events from the loss of sight in one eye, to terminal cancer. The broad range of conditions covered makes a payout more likely and this is why this type of cover is some of the most expensive in the business owner’s life insurance market.
Critic illness cannot be added to relevant life insurance, but it can be taken out as a standard business protection policy, such as key person or shareholder protection, to compliment a business owner’s life insurance setup.
Guaranteed Insurability
Offered as a low cost add-on, this will allow you to increase your life cover in future, even if your medical history has changed. You can increase your policy value usually by around 20% without the insurer reassessing you for medical underwriting. If your medical circumstances change, this can be a great add-on for the policy.
More About Relevant Life Cover
HMRC approved relevant life as a tax relievable expense back in 2006 as a way to offer small business owners an alternative to group protection. Group protection is a policy that is usually offered by larger companies where all employees are added to one policy. It only really makes sense when you have more than 10 members, so for smaller SME’s relevant life cover is the best alternative.
As well as offering corporate and income tax relief, there is no benefit in kind tax which makes this a rare personal benefit for you and your family that HMRC will allow you to claim tax free.
Tax Relief
If a policy premium was £100 a month, the business could claim corporation tax relief on this amount at its rate, for example, a 25% corporation tax payer would save £25 on the value of the premiums.
Compared to paying for life insurance personally, it saves a lot of money. For example, the same premium paid for by the business would cost £49.38 in corporation tax and a further £48.15 in income tax via dividends. This means the true cost of the policy to the business is £197.53.
When you compare the costs of the two side by side, the saving over a 15 year policy would be £22,055, making relevant life the clear winner for tax-efficient business life insurance.
Can Relevant Life Be Used By Company Employees?
Many business owners offer business life insurance cover to employees as well as company directors to provide financial support and a financial safety net in the event of a serious illness, or even death. At this difficult time, their families may not have the financial resources to deal with a sudden change which is why adding this to part of a wider benefits package can be great for a key employee.
When an employer takes out a relevant life policy on the life of an employee, the employee benefits from the additional financial security that is usually offered by group life insurance schemes or by personal life insurance, but in a more tax deductible way.
Which Types of Company Can Use Them?
Sole traders and limited liability partnerships cannot use relevant life cover and they can only be used by UK limited companies. A limited liability partnership is technically not a company or single entity, so other kinds of business protection insurance may be an alternative.
Other Types Of Business Life Insurance Policies
There is a range of business owner life insurance policies that can offer some additional financial security to a business as well as life cover.
Key Person Insurance
Key person insurance allows you to insure the value key employees bring to the business should they die or become critically ill to limit the risk to the business’s stability. For example, a key sales person might bill £100,000 income per year. You could insure them for £100,000 and, if they died or became critically ill, the business would receive an insurance payout of £100,000 tax free. The purpose is that this gives you a year to find a replacement, with no drop in income.
Key Person Income Protection
Similar to key person insurance, this policy compliments business owners life insurance and allows you to insure the monthly income that an employee earns for the company. However, it is not limited to a critical illness or death. The employee can be away from work due to illness or an accident that wouldn’t otherwise have been classed as a critical illness.
It is possible for the life assured to have time away from work and then return again once better. There is a 24-month limit that the policy will pay out for each illness, so keep this in mind.
Tax Treatment – Key Person Income Protection
In the same way that key person insurance is tax free, so is key person income protection. The company pays the premiums but cannot claim corporation tax relief on them. The life assured pays no benefit in kind and the business receives the benefit tax free if claimed.
Shareholder Protection Insurance
Many businesses have business partners and, in the event of one of them dying, it is important to consider how their shares will be treated. If they are left in a will to the shareholder’s family you might end up with a business partner who doesn’t understand the business, but now has an influential say in how the business is run. This can make it hard to maintain control.
A shareholder protection policy is life insurance that is taken out on the business owners and is a type of ownership protection. In the event of their death, the policy will pay a lump sum out either to the surviving shareholders or to the business, subject to how it has been set-up. They then, in turn, use the funds to buy back the shares from the family of the deceased. This gives the family a lump sum, for value payment for the shares and the surviving business owners the shares back.
Tax Treatment – Shareholder Protection Insurance
Subject to how the policy is created, it is possible for the company to pay the premiums. No corporation tax relief is available, but any payout to the company or the surviving shareholder will be tax free. If the benefit of the policy is paid to the surviving shareholders, there would be a benefit in kind charge for each life assured, so keep this in mind when considering this policy.
Business Loan Protection
If your business has any outstanding debts, having business life insurance can be prudent. When a business takes out a business loan the business must protect itself against the financial risks of a drop in income to see the business running smoothly. Business loan protection can settle any outstanding debt and be a cost effective life insurance policy that provides business loan protection.
Finding The Right Cover For You
To find the best business life insurance for larger or small businesses, our team can provide quotations for all insurers offering life insurance and find the best policy for you. We can give you a quote in just 60 seconds and provide you with comparisons from all leading insurers for you to consider and make a decision. If you’d like to arrange a consultation, contact our team today.
Frequently Asked Questions
Can I Put Business Life Insurance Through My Business?
Yes, you can put life insurance through your business, especially in forms like relevant life or company life insurance, which offer tax benefits and are often considered tax deductible business expenses.
What Is Business Life Insurance Called?
Business life insurance is commonly referred to as key person insurance, shareholder protection insurance, or relevant life insurance, depending on its specific purpose and the beneficiaries it covers.
Can A Business Partner Insure Your Life?
Yes, a business partner can insure your life, especially in a situation where your contribution is vital to the business. This is typically done through shareholder protection insurance, relevant life insurance or another type of business life insurance policy.
What Is Business Life Insurance?
Business life insurance is a policy that provides financial protection to a business in case of the death or critical illness of a key person, owner, or business partner. It ensures financial stability and continuity for the business during challenging times.
Does Business Life Insurance Cost More Than A Personal Policy?
No. The premiums quoted are exactly the same for both personal and business policies.
Which Insurers Offer Business Owners Life Insurance?
The usual insurers are L&G, LV, Zurich, amongst several others.
