The life cover most directors are missing

Here is a small thing that costs directors a surprising amount of money. Most people who run a limited company either have no life cover at all, or they pay for it personally, out of income they have already been taxed on. Very few know there is a version designed specifically for them, paid for by the company, that provides the same protection for their family at close to half the cost. It is called a Relevant Life Plan, and it is one of the most useful arrangements that almost nobody talks about. 

What it is 

A Relevant Life Plan is life cover on a single director or employee, arranged and paid for by the company. If the person covered dies, or is diagnosed with a terminal illness, the policy pays a lump sum. That money goes to their family, not to the business. In effect it gives a small company the kind of death-in-service benefit that large employers offer as standard, without needing a whole group scheme to do it. 

It is written into a trust from the outset. That sounds technical, but the point is simple and valuable: the payout goes directly to the people you choose, usually free of inheritance tax, and it does not normally count against your pension allowances. Your family receives the full sum, at the moment they need it, without it becoming tangled in your estate. 

Why it costs so much less 

The saving comes from how it is paid for. Because the company pays the premiums, and they are normally treated as an allowable business expense, the cost is deducted before corporation tax. The premium is not treated as a taxable benefit for you, and there is no National Insurance on it for you or the company. Compare that with personal cover, which you fund from money that has already been through income tax and National Insurance on the way to your pocket. 

Illustration. Assumes 40% income tax, National Insurance, and 25% corporation tax relief. Based on Drewberry and BizAssured worked examples. 

The difference is real money. On the figures in the illustration, providing £100 a month of cover personally costs a higher rate director around £197 once tax is accounted for, while the same cover through a Relevant Life Plan costs the business around £75. Over the life of a policy that gap runs to tens of thousands of pounds, for exactly the same protection. You are not buying anything different. You are simply paying for it in a far more sensible way. 

Who it suits 

It fits a lot of people who currently have nothing suitable in place. If you run a small company that is too small for a group scheme, this gives you an equivalent. If you are a higher earner who wants generous family cover without it eating into your pension limits, it does that too. And if you are one of the many directors quietly paying for personal life insurance out of your own taxed income, this is very often the same cover at a much lower real cost. 

It is worth being clear about what it is for, because business owners meet several types of cover and they are easily confused. Key person cover protects the business. Shareholder protection buys a deceased owner’s shares. A Relevant Life Plan does neither of those. It looks after your family. Many owners need more than one of these, working together, which is exactly the sort of picture an adviser is there to map out. 

Where to start 

The cover has to be set up correctly, with the right trust in place, to work as intended, which is why it is worth arranging through an independent financial adviser (IFA) rather than buying something off the shelf. Our independent financial advisers at Bower Wealth put these plans in place for directors regularly, alongside your accountant, and the exact tax treatment will depend on your circumstances. 

If you are paying for life cover personally, or have been meaning to sort it out and never have, this is one of the easier wins available to a company owner. 

Bower Wealth is an independent financial adviser (IFA), whole of market and not tied to any provider. We work with business owners and families throughout the United Kingdom, including many close to home in Essex, Hertfordshire and London. Your first conversation is free and without obligation. 

SOURCES 

Figures are correct at the time of publication. 

1. 1.  A company director in the 40 percent tax band could save up to around half the cost compared with equivalent personal life cover: BizAssured; Drewberry.
2. 2.  Worked example of £100 a month of cover costing roughly £197 personally versus about £75 through a Relevant Life Plan, with savings running to tens of thousands over a 20 year policy: Drewberry Relevant Life calculator.
3. 3.  Premiums are normally an allowable business expense, are not treated as a benefit in kind, and carry no National Insurance; the plan is written in trust and does not normally count towards pension allowances: Royal London; BizAssured.