Most business owners need cover in three areas: an income if they cannot work, a lump sum if they are diagnosed with a serious illness, and life cover for their family. If you run a limited company, two of these can often be paid for by the business in a tax-efficient way, through relevant life cover and executive income protection. Separate cover, such as key person and shareholder protection, looks after the business itself.
Why is protection different when you own the business?
Employees of larger firms often have sick pay, death in service benefit and sometimes income protection through work. When the business is yours, there is usually nothing beyond Statutory Sick Pay unless you have set it up. If you cannot work, the business may struggle too, so the income you rely on and the business that produces it are exposed at the same time.
What is income protection?
Income protection pays a regular monthly income if illness or injury stops you working. It starts after a waiting period you choose, often between one and six months, and continues until you return to work, the policy ends or you retire, depending on the terms.
You can own a policy personally, or your company can take out executive income protection for you. With an executive policy, the company pays the premiums, which are usually an allowable business expense. If you claim, the benefit is paid to the company, which then pays you through payroll in the normal way, with income tax and National Insurance deducted. Some policies can also cover your employer pension contributions while you are off.
What does critical illness cover pay for?
Critical illness cover pays a tax-free lump sum if you are diagnosed with one of the serious conditions defined in the policy, such as some cancers, heart attacks and strokes. The money can clear a mortgage, pay for treatment or adaptations, or give you time to recover without worrying about the business. Critical illness cover is usually owned personally, and the definitions vary between insurers, so the detail matters.
What is relevant life cover?
Relevant life cover is life insurance for an individual director or employee, paid for by the company. It works like a death in service benefit for one person and pays a lump sum to your family if you die, or are diagnosed with a terminal illness, during the term.
The tax treatment is what makes it attractive:
- premiums are usually an allowable business expense, provided they meet the wholly and exclusively test
- premiums are not normally treated as a taxable benefit in kind for you
- no National Insurance is due on the premiums
- it sits outside pension rules, so it does not use up your annual allowance
- it is written in trust, so the money can go straight to your family
It only covers death and terminal illness. It cannot include critical illness cover.
Example
- For a director paying tax at the higher rate and drawing dividends, paying a £100 monthly premium personally needs around £208 of company profit, after corporation tax at 25% and dividend tax at 35.75%.
- Paid by the company as relevant life cover, the same premium costs the company £100, or £75 after corporation tax relief at 25%.
How do key person and shareholder protection fit in?
These protect the business rather than you personally.
Key person cover pays the company a lump sum if someone whose skills or relationships drive the profits dies or becomes seriously ill. It can pay for recruitment, cover lost profit or reassure lenders. Its tax treatment depends on the circumstances.
Shareholder protection gives the remaining owners the money to buy the shares of a shareholder who dies or becomes seriously ill, usually alongside a legal agreement. Your family receives a fair value for the shares, and the business stays with the people running it.
Which cover should come first?
It depends on who relies on you, what you owe, who you are in business with and what cover you already have. A sensible starting point is to ask what would cause the most damage if it happened tomorrow, and to cover that first. Our risk reality calculator uses national statistics to show the chance of not reaching retirement for someone of your age, and how long your own savings would last if your income stopped.
We look at protection alongside your mortgage and your financial plan, so the cover matches what it needs to protect and the way it is paid for makes sense for you and your company.
Frequently asked questions
Can my limited company pay for my life insurance?
Yes. Relevant life cover is paid for by the company and pays out to your family through a trust.
Is relevant life cover a taxable benefit?
Not normally. The premiums are not usually treated as a benefit in kind, and no National Insurance is due on them.
Can relevant life cover include critical illness?
No. Relevant life cover can only pay out on death or terminal illness. Critical illness cover needs a separate policy.
Is executive income protection tax deductible?
The premiums are usually an allowable business expense. Any benefit is paid to the company and passed to you through payroll, with tax and National Insurance deducted.
Start with a conversation
If any of this sounds like your situation, start with a conversation. Call the office on 020 3751 5680, email office@lucro.co.uk or book a time at lucro.co.uk/contact. We will look at the whole picture, your business, your family and your plans, and tell you plainly what we think.
Important
Protection policies typically have no cash value at any time and cover will end at the end of the term. If you stop paying premiums, your cover will end.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
This article is for general information and is not personal advice. The cover available, its cost and its tax treatment depend on your circumstances, your health and the insurer's terms.