Limited Company Life Insurance

By Alex Ogden
limited company life insurance
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How Limited Company Life Insurance Can Safeguard Your Business’s Future

When it comes to safeguarding the future of a company and its key members, limited company life insurance is an essential consideration. This form of cover ensures that in the event of an untimely death, the company can continue to operate smoothly, and the families of the deceased are financially supported. In this comprehensive guide, we’ll explore the various aspects of life insurance tailored specifically for limited companies, focusing on the benefits, options, and considerations for company directors and employees.

Understanding Limited Company Life Insurance

What is Limited Company Life Insurance?

Limited company life insurance, often termed as “relevant life insurance,” is a policy taken out by a company to provide a death-in-service benefit for its directors and employees. This type of life insurance is designed to pay out a tax-efficient lump sum to the deceased’s family or estate, helping to alleviate financial burdens during a difficult time.

The Appeal of Relevant Life Insurance

Relevant life insurance policies are particularly attractive because they offer tax-efficient benefits. Unlike personal life insurance, premiums paid towards relevant life insurance are typically considered an allowable business expense, potentially reducing the corporation tax bill. This makes it an economically sensible choice for many businesses.

The Benefits of Life Insurance for Company Directors

Director Life Insurance: A Key Asset

For company directors, securing life insurance can be a prudent move. Director life insurance, a form of relevant life insurance, provides a safety net, ensuring their family’s financial future is protected. The cost of these policies is often lower than personal life cover due to the tax efficiency of the scheme.

Significant Savings with Tax-Efficient Policies

Opting for tax-efficient life insurance, like relevant life insurance, can result in significant savings for both the director and the company. The premiums are usually tax-deductible, reducing the overall corporation tax. Additionally, payouts are typically free from income tax and inheritance tax, offering a sizeable tax saving.

Choosing the Right Life Insurance Policy

Evaluating Life Insurance Options

When selecting a life insurance policy, several options are available, including relevant life insurance policies, group life insurance schemes, and personal life insurance. Each type has its advantages and considerations, and the choice largely depends on the company’s size, the number of employees, and specific needs of the individuals involved.

Personal vs Company Life Insurance

While personal life insurance is taken out by an individual and paid from their own pocket, company life insurance is a policy taken out by a business to cover its employees or directors. Company life insurance, especially relevant life policies, can offer more tax benefits than personal life insurance, making it a preferred choice for many business owners.

Tax Implications and Considerations

Understanding the Tax Benefits

One of the key attractions of limited company life insurance is the potential tax benefits. Premiums paid by the company are not treated as a benefit in kind, meaning they are not subject to income tax or national insurance contributions. Furthermore, the company can claim corporation tax relief on the premiums, reducing the net cost of the policy.

Avoiding the Inheritance Tax Burden

Typically, the payout from a life insurance policy is subject to inheritance tax. However, with relevant life insurance, if the policy is written in trust, the lump sum benefit is usually paid directly to the beneficiaries, bypassing the deceased’s estate and therefore not subject to inheritance tax.

Setting Up Your Life Insurance Policy

Working with a Financial Advisor

Choosing and setting up the right life insurance policy can be complex. Company directors and business owners should consult with a financial advisor who understands the nuances of relevant life insurance and can provide guidance tailored to their needs.

The Process of Establishing a Policy

Setting up a relevant life insurance policy involves determining the amount of cover required, choosing a provider, and understanding the terms and conditions of the policy. Ensuring the policy is written in a discretionary trust is also crucial to maximise the tax benefits.

Navigating Life Insurance in a Limited Company Setting

As we dive deeper into limited company life insurance, it’s essential to understand the various schemes and policies available to directors and employees.

Group Life Insurance Scheme: A Comprehensive Overview

What is a Group Life Insurance Scheme?

A group life insurance scheme is a policy taken out by a company that provides a lump sum benefit to employees’ families if they die while employed. It’s a type of death-in-service benefit covering all employees or specific groups within the company. Group schemes are particularly beneficial for companies with several employees, offering a uniform benefit structure across the board.

Advantages of Group Life Insurance

One of the main advantages of a group life insurance scheme is the sense of security it provides to employees. Knowing their loved ones will receive financial support in their absence can boost morale and loyalty. For employers, these schemes can be set up as an allowable business expense, offering tax benefits and enhancing the overall benefits package.

Delving into Relevant Life Policies

Understanding Relevant Life Policy

A relevant life policy is a standalone life insurance policy available to employees, including directors of limited companies. It’s designed to pay out a tax-efficient lump sum on the death (or diagnosis of a terminal illness) of the person insured. Unlike group life insurance schemes, relevant life policies are individual contracts beneficial for small businesses with too few employees to warrant a group scheme.

The Cost and Cover of Director Life Insurance

Director life insurance cover is a relevant life policy tailored specifically for company directors. It provides a way for directors to secure substantial life cover at a lower director life insurance cost due to the tax efficiency of the policy. The level of cover is usually based on a multiple of the director’s remuneration, considering salary and dividends.

The Financial Aspects of Life Insurance

Tax Deductible Business Expense

One of the most appealing features of relevant life policies and group life insurance schemes is their status as a tax deductible business expense. This status can reduce corporation tax liabilities for the company, making it a financially savvy choice. However, it’s important to ensure the policy qualifies as an allowable business expense under current tax laws.

Considering Lifetime Pension Allowance

When discussing life insurance in the context of a limited company, it’s also important to consider its interaction with lifetime pension allowance. Unlike personal life insurance, relevant life cover does not count towards the individual’s lifetime pension allowance, providing an additional benefit for those with substantial pension pots or close to their allowance limit.

The Relevance of Relevant Life Cover

Tailoring Relevant Life Cover

Relevant life cover is a flexible option that can be tailored to suit the specific needs of the company and the individual. The amount of cover, the term, and other specifics can be adjusted to provide optimal benefits. Directors and employees must assess their needs and work with a financial advisor to tailor the policy accordingly.

Tax Efficiency of Relevant Life Cover

Tax efficiency is a significant draw of relevant life cover. Not only are the premiums typically an allowable business expense for the company, but the benefits are also usually paid out free from income tax and inheritance tax. This efficiency makes relevant life cover a preferred option for many looking to maximize the financial benefits of life insurance.

Maximising Benefits with the Right Coverage

As we delve further into the intricacies of life insurance in a limited company context, understanding how to maximize coverage and benefits becomes crucial.

Determining Coverage Needs

Assessing How Much Cover Is Needed

Determining the right amount of life insurance cover is fundamental for any director or employee considering a policy. The level of cover should reflect the individual’s salary, debts, dependents, and overall financial situation. It’s also influenced by the company’s capacity and willingness to pay premiums. Consulting with a financial advisor can help assess how much cover is sufficient to provide financial security.

Broadening Protection with Critical Illness Cover

The Importance of Critical Illness Cover

In addition to life insurance coverage, many policies offer the option to include critical illness coverage. This type of cover provides a lump sum benefit if the insured is diagnosed with a specified critical illness. Including critical illness coverage can broaden the protection offered by the policy, providing financial support during a health crisis.

Balancing the Cost and Benefits

While critical illness cover can provide extensive protection, it also increases the policy’s cost. Directors and companies must balance the additional cost against the potential benefits, considering the likelihood of claiming and the financial impact of a critical illness on the individual and the company.

Understanding Relevant Life Plans

Choosing a Relevant Life Plan

A relevant life plan is a life insurance policy designed specifically for employees, including directors of limited companies. It’s an individual policy that offers tax-efficient benefits to both the company and the employee. When choosing a relevant life plan, it’s important to consider the terms, benefits, and exclusions to ensure it aligns with the individual’s needs and the company’s objectives.

Managing Relevant Life Policy Costs

The cost of a relevant life policy is an important consideration for any business. Relevant life policy cost varies depending on factors such as the amount of cover, the age and health of the person insured, and the policy’s terms. Companies need to weigh the cost against the tax benefits and the value of the cover provided to determine the most cost-effective option.

Tailoring Insurance to Individual Needs

Personalising the Director’s Life Insurance Policy

Each director’s life insurance policy should be tailored to their unique needs and circumstances. The director’s age, health, family situation, and financial obligations should influence the policy’s structure and coverage. Personalising the policy ensures adequate protection and aligns with the director’s long-term financial planning.

Personal Cover vs. Company Provided Cover

While company-provided life insurance offers many benefits, directors should consider their personal cover needs. Personal cover can complement company-provided insurance, offering additional protection and flexibility. Directors must assess their total insurance coverage to ensure it provides comprehensive protection against life’s uncertainties.

Financial Considerations for Limited Companies

How Does a Limited Company Pay for Life Insurance?

A limited company pays for life insurance as a business expense. The premiums are usually considered an allowable business expense, providing tax benefits to the company. The exact method of payment and accounting treatment can vary, so it’s important to consult with a financial advisor or accountant to ensure compliance and maximise tax efficiency.

Balancing Company and Personal Interests

When a limited company takes out a life insurance policy on behalf of its directors or employees, it’s essential to balance the company’s financial interests with the personal interests of the individuals covered. The policy should provide adequate cover and benefits to the individuals while being cost-effective and tax-efficient for the company.

Concluding Thoughts on Limited Company Life Insurance

In conclusion, navigating the landscape of limited company life insurance requires a thorough understanding of the various policies available, the tax implications, and the specific needs of both the company and its directors. Whether considering a relevant life plan, group life scheme, or director-specific life insurance, each option offers unique benefits and considerations. With careful planning and expert advice, companies can provide valuable financial protection for their directors and employees, ensuring peace of mind and stability for the future.

Frequently Asked Questions

Can you put life insurance through your limited company?

Yes, a limited company can put life insurance through the business, typically as a relevant life policy or group life insurance scheme, which is considered an allowable business expense and offers tax benefits.

Can I put my life insurance through my company?

As a director or employee, you can have life insurance through your company in the form of a relevant life policy or group life insurance, providing tax-efficient benefits and coverage.

Can I claim life insurance as a business expense?

Life insurance can be claimed as a business expense if it is a relevant life policy or part of a group life insurance scheme, allowing the company to potentially claim corporation tax relief on the premiums.

Can a director have a relevant life policy?

Yes, a director of a limited company can have a relevant life policy, which is specifically designed to provide tax-efficient life insurance for employees and directors of companies.

Which insurance companies offer all of these policies?

Business protection is a popular segment of the market and providers like L&G, Zurich, Vitality and several others can offer you terms on a range of policies. We can do the leg work for you so use our team to source the best deal for your business.