The importance of life insurance and critical illness insurance for limited company directors

Working for yourself and setting up your own limited company offers many benefits. However, it, unfortunately, means you lose some of the benefits that are offered to permanent employees, such as sick pay. Whilst it is not a subject anyone wants to think about, it is worthwhile having the relevant insurances in place in the unlikely event that something may happen.

As a contractor, it is worth considering the following types of insurance covered in this blog to ensure you and your family are protected.

Critical Illness Insurance

Critical Illness Insurance is aimed specifically at self-employed individuals and will cover you in the event of a diagnosis of a serious medical condition. There are around 50 critical illnesses covered within this type of insurance including cancer, suffering a stroke and multiple sclerosis. It is important that you check what is and isn’t covered by the policy you choose to take out – as with most types of insurances it can differ depending on the provider.

Most critical illness covers will pay a single, tax-free lump sum if you are unfortunately diagnosed with one of the critical illnesses listed in your insurance. You can choose to spend the money as you see fit, for example:

• Contributing to company debts
• Paying off medical bills
• Investing into a fund to provide you with an income if you are unable to work

Life Insurance Policy Options

Many permanent employees benefit from death-in-service policies which are paid for by their employer. Contractors can benefit from a similar Life Insurance policy which will pay out a combination of dividends and salary funded by their limited company, with allowances for a Corporation Tax deduction and no inheritance tax liabilities.

Contractors can choose between two main types of insurance:

1. Term cover – this provides financial cover to the contractor’s family if the contractor dies within the specified cover period. Unfortunately, when the term expires the financial cover ends.
2. Whole of life cover – this is a more expensive type of cover but as a result, the financial protection for a contractor’s family is greater. The policy will pay out in the event of a contractor’s death at any age.

Both of the types of insurance listed above can be further divided into types of cover which are specific to the contractor and their requirements.

Relevant Life Insurance: a more tax-efficient policy for contractors

Relevant Life Insurance is exactly the same as standard life insurance and will pay out a lump sum to your family if you were to die. However, unlike standard life insurance, relevant life insurance is paid via your limited company and can, therefore, save you money.

The premium for relevant life insurance is paid out of your limited company’s pre-tax profits and is subject to Corporation Tax relief. This results in significant tax savings for you, as a standard life insurance policy is paid out of your own salary or dividends. A standard policy’s payout is subject to Corporation Tax, Income Tax and National Insurance Contributions if the money is drawn from the company in the form of a salary. If it is paid out via dividends, it will be subject to dividend taxation.

The premiums for relevant life insurance are not seen as a benefit-in-kind so you will not lose any of your tax-free allowances, and will not need to report the premiums on your annual P11D form. The insurance is also tax efficient when paying out to your beneficiaries. If placed into a trust correctly there are no income or inheritance tax liabilities due on the pay-out.

Similarly to life insurance, the policy will remain in place for as long as you keep up the monthly payments. If you decide to return to permanent employment and close down your limited company, you can transfer the policy into your own name. However, you would lose the tax benefits associated with paying the premiums out of your limited company. This continuity is vital in the unfortunate event of a contractor developing a condition or illness which makes them uninsurable for a new life insurance policy.

Churchill Knight can relieve the administrative burden for limited company owners

Churchill Knight & Associates Ltd has been supporting contractors and freelancers since 1998. Our expert accountants will assist with your payroll, bookkeeping and invoicing. This will leave you with more time to focus on your business and do what you love best.

For more information on our limited company accountancy packages please visit our website, or call 01707 871622 to speak to one of our experts.

* Calculator for illustration purposes only and uses assumptions. Limited figures based on 52 weeks, expenses £50 per week, £9,100 salary and accountancy fees included. As of 1st April 2023, there is no longer a single rate of Corporation Tax. The calculator uses assumptions and estimates and is designed to be accurate by individual circumstances will vary. Umbrella figures based on 52 weeks, £15 per week margin and holiday pay paid out. For a more accurate calculation tailored to your requirements, please contact Churchill Knight today by calling 01707 871 622 or contact us here.